REPORT 


TO  THE 

Committee  on  Gas,  Oil  and 
Electric  Light 


ON  THE 

Investigation 

OF  THE 

COMMONWEALTH -EDISON 
COMPANY 


Chicago — May  1913 


0^2 1- 


COMMITTEE  ON  GAS,  OIL  AND 
ELECTRIC  LIGHT 

CITY  COUNCIL 

— — ' OF  THE  ■=- — — - 

CITY  OF  CHICAGO 


Ald.  Lewis  D.  Sitts,  Chairman 


Ald.  Jos.  F.  Ryan 
Ald.  Theodore  K.  Long 
Ald.  Chas.  E.  Merriam 
Ald.  Eugene  Block 
Ald.  Frank  J.  Vavricek 
Ald.  Albert  W.  Beilfuss 
Ald.  Stanley  S.  Walkowiak 
Ald.  Martin  J.  Healy 


Ald.  James  B.  Bowler 
Ald.  James  E.  Burns 
Ald.  John  Haderlein 
Ald.  Charles  Twigg 
Ald.  Felix  B.  Janovsky 
Ald.  James  A.  Kearns 
Ald.  George  A.  Bradshaw 
Ald.  Jacob  A.  Hey 


Digitized  by  the  Internet  Archive 
in  2017  with  funding  from 

University  of  Illinois  Urbana-Champaign  Alternates 


https://archive.org/details/reportoninvestig00chic_0 


TABLE  OF  CONTENTS. 


PAGE. 

Letter  of  Transmittal  3 

Preface  4 

Synopsis  5 

Recommendations  9 

Historical 9 

Valuation,  General  Discussion 23 

Valuation,  Basis  of  24 

Valuation,  Summary  of  1908  Appraisal  28 

Valuation,  Revised,  as  of  June  30th,  1911 50 

Overhead  Charges  29 

Brokerage  32 

Paving  32 

Depreciation,  Accrued  * 35 

Depreciation,  Annual  Allowance  for 64 

Sundry  Investments  37 

Intangible  Values  38 

Working  Capital  46 

Revenue  50 

Expense,  Coal  56 

Expense,  Purchased  Power  56 

Expense,  Other  57 

Expense,  Allowance  for  Depreciation  64 

/Rate  of  Return  68 

Rate  of  Return,  Chicago  Public  Utilities  72 

Rates,  Some  Principles  Observed  in  Making 74 

Rates,  in  Other  Cities ' 95 

Rates,  History  of  Maximum 100 

Railway  and  Bulk  Supply  Business 77 

Wholesale  Light  and  Power 91 


PAGE. 

Municipal  Lighting  ....92-93 

Retail  Lighting  . v . . * 102 

Retail  Power 105 

Rate,  Possible  Reductions  in  1912 106 

Rate  Reductions.  Future 107 

APPENDIX— 

Electrical  Generation  and  Distribution 110 

Electrical  Units  110 

Maximum  Demand  Table  Ill 

Testing  of  Meters 112 

Method  of  Computing  Bills  112 


LIST  OF  DIAGRAMS. 


DIAGRAM.  PAGE. 


1.  Increase  in  Total  Investment  Contrasted  with  Investment  Neces- 

sary to  Produce  $1.00  Gross  or  Net  Revenue 17 

2.  Growth  of  Income  and  Variation  in  Comparative  Ratio.  18 

3.  Decrease  of  Investment  and  Income  per  Customer,  and  Growth 

of  Earnings  and  Number  of  Customers 19 

4.  Growth  in  Connected  Load 20 

5.  Increase  in  Total  Output  and  Current  Sold  for  Railway,  Light 

and  Power  Purposes 21 

6.  Curves  Showing  Kilowatt  Output  for  the  Average  Day  of  Each 

Year  Since  1900 22 

7.  Increase  in  Income  From  Various  Classes  of  Business 53 

8.  Decrease  in  Income  per  Unit  of  Connected  Load 54 

9.  Decrease  in  Income  per  Kilowatt  Hour  Sold 55 

10.  Return  on  Stock  from  Varying  Allowances  on  Total  Investment.  . 70 

11.  Rate  of  Return  in  Past  on  Capital  Stock  and  Plant  Investment.  . 73 

12.  Comparative  Loads — New  York — Chicago 78 

13.  Comparative  Loads — Boston — Chicago 79 

14.  Annual  Load  Factors 80 

15.  Maximum  System  Load — Year  1911 81 

16.  Station  Load  Distribution — Year  1911 81 

17.  Summer  Load  Curve — Year  1911 82 

18.  Rates  for  Certain  Chicago  Installations 96 

19.  Graphic  Comparison  of  Several  Large  Companies 98 

- 20.  Effect  of  Past  Rate  Reductions  on  Certain  Installations 101 

21.  Results  of  Increased  Lamp  Efficiency  and  Rate  Reductions 103 

22.  Revenue  and  Cost  of  Service  for  Average  Retail  Customers 104 

23.  Increase  in  Rate  of  Return  and  Surplus  with  Decreasing  Rates.  . 107 

24.  Increase  in  Economy  of  Fuel  Consumption 108 


25.  Elements  of  a Large  Electric  System  and  Losses  of  Energy  in 


Various  Parts 


111-A 


V 


$ 


LIST  OF  TABLES. 


TABLE. 


PAGE. 


1. 

2. 

3. 

4. 

5. 

6. 

/ . 
8. 

9. 

10. 

11. 

12. 

13. 

14. 

15. 

16. 
17. 


18. 

19. 

20. 


Statistics  on  Basis  of  Revised  Figures 8 

Income  Statements  and  Balance  Sheets,  Chicago  Edison 

Co 13  and  14 

Income  Statements  and  Balance  Sheets,  Commonwealth  Electric 

Co 15 

Income  Statements  and  Balance  Sheets,  Commonwealth  Edison 

Co 16 

Comparative  Data  Based  on  Companies’  Published  Statements. . . 16a 

Working  Capital  48 

Summary  of  Investment 49 

Comparison  of  Income  in  Dollars  and  Sales  in  Kilowatt  Hours 

for  Year  1911 51 

Comparison  of  Income  in  Dollars  and  Sales  in  Kilowatt  Hours  for 

Year  1912 52 


Total  Expense  (Exclusive  of  Depreciation)  for  1911 60  and  61 

Total  Expense  (Exclusive  of  Depreciation)  for  1912 62  and  63 

Depreciation  on  Various  Classes  of  Investment 67 

Depreciation  Allowance  for  the  Year  1911 68 

Comparison  of  Chicago  Public  Utilities 71 

Railway  and  Bulk  Supply  Expense  (Exclusive  of  Deprecia- 
tion)   84  and  85 

Summary  of  Light  and  Power  by  Rate  Schedules 88 

Expense  Other  than  Railway  and  Bulk  Supply  (Exclusive  of 

Depreciation)  89  and  90 

Light  and  Power  Rates  in  Other  Cities 95 

Statistical  Comparison  of  Several  Large  Companies 97 

Rates  in  Other  Cities  on  a Comparative  Basis 99 


Commonwealth  Edison  Maximum  Rate  Investigation 


Chicago,.  May  14,  1913. 

To  the  Committee  on  Gas,  Oil  and  Electric  Light  of  the  City  Council 

of  the  City  of  Chicago,  Hon.  Lewis  D.  Sitts,  Chairman. 

Gentlemen  : 

We  respectfully  submit  herewith,  in  accordance  with  your  Com- 
mittee's request  of  August  27,  1912,  a report  upon  the  results  of  an 
investigation  of  the  Commonwealth  Edison  Company  which  has 
been  carried  on,  under  the  direction  of  the  City  Electrician,  by  A.  C. 
King,  Engineering  Expert  for  the  Department  of  Electricity,  and 
C.  B.  Willard,  Expert  Accountant  for  the  City  Comptroller. 

The  object  of  the  investigation  has  been  to  study  the  accounts, 
records  and  operation  of  this  company  for  the  purpose  of  furnishing 
your  Committee  with  all  information  necessary  to  fix  fair  and  rea- 
sonable maximum  electric  rates  for  a period  not  to  exceed  five  years 
from  the  date  of  acceptance  of  the  new  ordinance  prescribing  such 
rates.  This  is  a means  of  regulation  authorized  by  an  Act  of  the 
General  Assembly  of  the  State  of  Illinois,  approved  May  18,  1905, 
and  in  accordance  with  the  terms  of  an  ordinance  passed  by  the 
City  Council  on  March  23,  1908. 

Throughout  this  investigation  the  Company  has  assisted  and 
co-operated  in  the  work  whenever  requested,  and  we  take  this  op- 
portunity of  acknowledging  the  courtesy  and  consideration  ex- 
tended by  the  Company  and  its  employes  to  the  City’s  representa- 
tives. 

The  recommendations  that  are  offered  follow  this  letter,  sum- 
marizing the  results  of  the  investigation,  in  order  that  the  Commit- 
tee may  readily  refer  thereto  in  its  consideration  of  the  subject 
matter  of  the  report. 

Very  respectfully, 

Ray  Palmer, 

City  Electrician. 
John  E.  Traeger, 

City  Comptroller. 


REPORT  ON  MAXIMUM  RATES  OF  THE  COMMONWEALTH 

EDISON  COMPANY. 


Preface : 

The  City  of  Chicago  has  the  right  to  regulate  the  Common- 
wealth Edison  Company  insofar  as  the  establishing  of  its  max- 
imum rates  for  electric  light  and  power  is  concerned.  In  order  to 
report  upon  what  are  “fair  maximum  rates”  for  the  different  classes 
of  service,  which  means  efficient  service  to  the  citizens  and  a rea- 
sonable return  to  the  Company  on  its  valuation,  it  is  necessary 
first  to  appraise  the  Company’s  property,  and  second  to  use  the 
appraisal  valuation  in  connection  with  book  values  of  the  Com- 
pany, in  determining  the  proper  distribution  of  income  and  ex- 
penses. As  it  was  impossible  for  an  appraisal  to  be  made  by  the 
City  in  this  investigation,  the  H.  M.  Byllesby  appraisal  as  of  June 
1st,  1908,  was  used. 

Basis  of  Investigation : 

While  neither  the  quantities  nor  unit  costs  of  the  appraisal 
could  be  checked  they  were  used  with  some  modifications  and  ad- 
justments. This  assumption  was  made  necessary  as  nearly  all 
old  books  and  records  of  the  Commonwealth  Electric  and  Chi- 
cago Edison  Companies  were  destroyed  some  time  after  the  ap- 
praisal had  been  completed  (although  they  were  available  for  the 
City’s  last  investigation  conducted  prior  to  the  passage  of  the 
ordinance  of  March  23,  1908). 

A new  appraisal,  which  has  been  made  by  the  Byllesby  Com- 
pany during  the  last  year,  was  not  completed  so  that  it  could  be 
used  for  this  report.  Our  valuation,  therefore,  was  obtained  by  ad- 
justments of  the  1908  appraisal  as  shown  in  detail  later  with  the 
proper  additions  and  reductions  to  June  30,  1911,  which  date  is 
considered  as  representing  a fair  average  investment  for  the  year 
1911. 

The  accounts  of  the  Commonwealth  Edison  Company  from  Sep- 
tember 17th,  1907  (the  date  of  consolidation  to  which  the  inven- 
tory was  adjusted  on  the  books),  to  December  31st,  1911,  were  ex- 
amined in  more  than  the  preliminary  manner  originally  intended. 
Income  and  expense  statements  for  the  year  1912  recently  avail- 
able are  also  presented  in  the  body  of  the  report  with  such 
adjustments  as  developed  in  the  audit  of  the  preceding  year.  The 
figures  for  the  year  1911  were  used  as  the  basis  of  this  report  and 
a detailed  audit  made  of  the  revenue  and  expenses. 

Quality  of  Service : 

The  “quality  of  service”  factor  has  been  given  considerable 
study  in  this  report,  as  it  is  believed  that  a monopolistic  public 
utility  company,  such  as  the  Commonwealth  Edison  Company  is  at 
the  present  time,  is  in  a position  to  give  the  highest  grade  of  ser- 
vice to  its  customers  at  minimum  rates,  after  paying  reasonable 


5 


returns  on  the  investment,  when  properly  managed  within  itself 
and  regulated  by  the  municipality  which  it  serves. 

If  a public  utility  company  is  well  managed,  as  this  one  has 
been,  a maximum  “quality  of  service”  may  mean  an  increased  fixed 
charge  or  operating  cost,  or  both,  and  consequently  less  avail- 
able for  return  on  the  investment  and  for  surplus. 

Surplus : 

Under  normal  conditions  if  the  service  given  as  a whole  is 
of  the  highest  grade  and  satisfactory,  and  the  per  cent  return  al- 
lowed on  the  investment  is  constant,  the  important  varying  factor 
in  each  year’s  business  is  the  surplus.  When  the  income  increases 
in  greater  proportion  than  the  proper  yearly  operating  charges 
and  expenses,  including  depreciation,  the  surplus  will  be  greater 
for  the  year.  There  should  be  a fixed  minimum  surplus  carried  by 
the  Company  to  assure  a fair  return  on  the  investment  during  the 
worst  years  of  operation,  but  when  the  surplus  is  increased  mate- 
rially over  this  amount  the  income  should  be  reduced  by  this  ex- 
cess through  the  reduction  of  rates.  This  is  a fair  principle  to  ap- 
ply, as  the  investor  is  protected  to  a reasonable  extent  on  his  in- 
vestment ahd  the  consumer  is  benefited  by  the  reduction  of  rates 
applied  to  keep  the  surplus  near  a fixed  amount  or  proportional 
part  of  the  Company’s  actual  investment. 

Reduction  of  Rates : 

Reductions  of  maximum  lighting  rates  of  the  Commonwealth 
Edison  Company,  during  the  last  five  years,  from  16  cents  to  10 
cents  primary,  and  10  cents  to  5 cents  secondary,  have  been  due  to 
the  following  reasons : 

The  installation  of  larger,  more  efficient  and  cheaper  gen- 
erating stations  and  distributing  systems. 

The  acquisition  of  large  wholesale  customers. 

The  increase  in  the  number  of  consumers  and  the  connected 

load. 

The  more  extended  use  of  electricity  by  the  general  public. 
These  conditions  are  largely  the  result  of  the  progressive  pol- 
icy of  the  Company. 

SYNOPSIS. 


Monopoly : 

The  Commonwealth  Edison  Company,  which  is  the  result  of 
a consolidation  of  many  competing  electric  companies  and  the  de- 
velopment of  this  consolidation  into  a well  organized  and  efficient 
public  utility,  is  a monopoly  at  the  present  time  in  the  electric 
light  and  power  supply  field  in  Chicago.  When  properly  regulated 
by  the  municipal  or  state  government,  a monopoly  is  ordinarily 
capable  of  furnishing  the  maximum  quality  of  service  at  minimum 
rates. 

Valuation : 

Two  appraisals  of  the  Company’s  property  have  been  made 
by  experts  employed  by  the  Company  during  the  past  five  years, 


6 


the  first  of  which  was  for  the  purpose  of  capitalization.  While  the 
City  has  had  no  connection  with  these  appraisals,  it  was  neces- 
sary to  use  the  figures  of  the  1908  appraisal  for  the  purpose  of  this 
report. 

Reductions  of  these  valuations,  as  of  Sept.  17th,  1907,  on 
account  of  adjustments  of  the  following  items,  were  made: 
Overhead  charges, 

Brokerage, 

Paving  over  conduit  not  paid  for  by  the  Company, 
Intangible  values, 

Accrued  depreciation. 

Valuation  of  the  property  as  of  June  30th,  1911,  was  increased 
on  account  of  adjustments  of  the  following  items : Interest  carrying 
charges  on  construction  between  date  of  appraisal  and  June  30th, 
1911 ; capitalization  of  investment  which  had  been  charged  to  ex- 
pense. The  June  30th,  1911,  valuation  was  reduced  on  account  of 
the  rejection  of  certain  unused  property. 

The  final  summary  of  valuation  as  of  June  30th,  1911,  of 
the  useful  physical  property  is  $52,200,189.00 ; intangible  value  and 
free  wiring,  $3,247,679.00,  and  working  capital,  $2,535,690.00,  a 
total  of  $57,983,558.00. 

Revenue  : 

Revenue  for  the  year  1911  was  increased  on  account  of  retro- 
active contracts  with  railway  customers  and  other  minor  ad- 
justments. The  total  as  revised  amounted  to  $14,038,115.00. 

Expense : 

Adjustments  were  made  in  the  amounts  charged  to  coal  shrink- 
age and  storage,  and  power  purchased  from  other  electric  com- 
panies. The  construction  items  charged  to  expense  during  the  year 
were  taken  from  expense  and  included  in  capital.  These  with  minor 
changes  also  made,  resulted  in  a total  expense  for  the  year  1911  of 
$7,007,980.00. 

Depreciation : 

An  allowance  for  depreciation  was  calculated  on  a 3 per  cent 
sinking  fund  basis  at  $1,987,252.00  from  the  revised  figures  of  the 
original  cost,  estimated  life  and  salvage  value  of  all  depreciable 
property,  which  amounted  to  3.63  per  cent  of  the  value  new. 

Rate  of  Return : 

A rate  of  return  of  7 per  cent  on  the  present  value  as  deter- 
mined for  rate  purposes  is  considered  fair  and  reasonable. 

Surplus : 

Investment,  revenue,  expense  and  depreciation  allowance  for 
the  year  1912  were  revised  on  a similar  basis  as  for  the  year  1911. 
The  surplus  earnings  above  a 7 per  cent  return  on  the  investment, 
after  all  proper  expenses  and  allowances  for  depreciation,  amounted 
to  $983,000.00  for  the  year  1911  and  $1,013,000.00  for  the  year 
1912. 

Revenue  from  Various  Classes  of  Business : 

A study  was  made  of  the  income  from  the  various  classes  of 


7 


service  furnished  by  the  Company,  including  railway  and  bulk  sup- 
ply, wholesale  lighting  and  power,  street  lighting,  retail  lighting 
and  retail  power,  as  well  as  the  various  contracts  pertaining  to  the 
above.  While  in  some  cases  it  was  found  that  the  return  on  the 
necessary  investment  was  somewhat  below  7 per  cent,  it  is  not  con- 
sidered that  an  unfair  burden  is  thereby  placed  upon  the  other 
classes  of  customers. 

A direct  apportionment  of  the  investment  necessary  for  fur- 
nishing retail  light  and  power  is  impossible,  but  calculations  made 
from  such  data  as  were  available  indicate  that  the  return  from  this 
business  exceeded  the  total  expense,  including  a 7 per  cent  return 
on  the  investment.  It  is  therefore  recommended  that  revisions  be 
made  on  these  rate  schedules.  Certain  rebates  and  special  classifi- 
cations of  customers  now  in  force  are  considered  unjustly  discrim- 
inatory and  should  be  abolished. 

Table  No.  1 sets  forth  statistics  on  the  basis  of  the  revised  fig- 
ares  used  in  this  report: 


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9 


RECOMMENDATIONS. 


It  is  recommended : 

1.  That  if  future  regulation  is  conducted  on  the  present  basis, 
m the  interest  of  economy  and  fairness,  the  public  authorities  be 
represented  on  any  appraisal  boards  appointed  for  the  purpose  of 
determining  the  value  of  the  Commonwealth  Edison  Company’s 
property  for  taxation,  capitalization,  rate  regulation  or  sale. 

2.  To  best  serve  the  interests  of  the  consumer  and  to  fairly 
treat  all  parties  concerned,  that  a complaint  and  service  bureau  be 
established  to  handle  complaints  of  service  and  questions  of  charges. 
This  bureau  can  be  so  organized  as  to  be  able  to  co-operate  with 
the  different  departments  interested,  in  compiling  the  necessary 
data  for  future  rate  regulation  and  service  supervision. 

This  bureau,  together  with  the  divisions  of  electrical  inspec- 
tion and  fire  prevention,  could  study  such  problems  as  the  over- 
loading of  lighting  circuits  with  domestic  power  consuming  appli- 
ances and  the  resulting  hazards. 

3.  That  a reduction  in  retail  rates  be  now  made,  which  can 
be  applied  in  one  or  more  of  the  following  ways : 

(a)  The  lighting  rate  be  10  cents  per  kilowatt  hour  for  the 
first  hour’s  daily  use  of  maximum  demand,  5 cents  for  the  sec- 
ond and  3 cents  for  all  excess,  placing  retail  light  and  power  on  the 
same  schedule,  and  eliminating  investment  in  extra  maximum  de- 
mand meters  and  wattmeters. 

( b ) A reduction  in  the  primary  rate,  both  light  and  power, 
below  a 10  cent  maximum. 

( c ) A reduction  in  the  secondary  rate,  both  light  and  power, 
below  a 5 cent  maximum. 

( d ) A reduction  in  the  number  of  hours  daily  use  of  max- 
imum demand  before  secondary  rate  is  effective. 

It  is  believed  that  recommendation  (a)  offers  the  greatest  num- 
ber of  advantages. 

4.  That  maximum  demand  meters  be  not  installed  in  future 
for  retail  light  and  power,  except  in  cases  where  they  appear  neces- 
sary for  statistical  purposes,  but  that  the  maximum  demand  be 
determined  from  present  data  and  statistics  revised  from  time  to 
time  as  conditions  demand. 

5.  That  special  discounts  now  granted  to  the  following  classes 
be  eliminated : drug  stores  distributing  advertising,  company  em- 
ployes, customers  having  more  than  one  premises,  hall  lighting  in 
apartment  buildings,  and  charitable  and  semi-charitable  organiza- 
tions. 


HISTORICAL. 

The  Commonwealth  Edison  Company  is  an  Illinois  corporation 
serving  the  City  of  Chicago  with  electricity  for  lighting  and  power 
purposes.  It  was  formed  by  the  consolidation  of  the  Common- 
wealth Electric  Company  and  the  Chicago  Edison  Company  as  of 
September  17th,  1907.  On  Mai;ch  23rd,  1908,  the  Chicago  City 
Council  passed  jan  ordinance  providing  that  the  franchise  of  the 


10 


Commonwealth  Electric  Company  be  extended  to  include  all  sub- 
sidiary companies  and  that  a compensation  of  three  per  cent  of  the 
annual  gross  receipts  during  the  remaining  life  of  the  franchise 
should  be  paid  to  the  City.  It  also  stipulated  the  maximum  rates 
for  electric  light  and  power  to  be  charged  by  the  Company  for  the 
period  ending  July  31st,  1912.  Up  to  the  time  of  the  consolida- 
tion, the  Chicago  Edison  Company  furnished  direct  current  ser- 
vice in  the  district  bounded  by  North  avenue  on  the  north,  Ash- 
land avenue  on  the  west,  39th  street  on  the  south,  and  Lake  Mich- 
igan on  the  east,  with  its  principal  generating  station  at  Harrison 
street  and  the  Chicago  River.  This  company,  which  succeeded  to 
the  franchise  of  the  Western  Edison  Light  Company,  was  organ- 
ized in  1887  and  began  operations  with  a generating  station  of  about 
800  horse-power  at  120  West  Adams  street,  where  a battery  sub- 
station and  the  main  offices  of  the  Commonwealth  Edison  Company 
are  now  located.  The  franchise  was  dated  April  7th,  1887,  cover- 
ing a period  of  25  years,  and  specified  that  all  wires  be  under- 
ground. 

The  Commonwealth  Electric  Company  was  formed  in  1897 
by  the  consolidation  of  five  companies  serving  a territory  south 
of  39th  street,  west  to  Western  avenue,  and  south  to  Pullman  and 
South  Chicago.  Its  franchise,  which  was  dated  June  28,  1897, 
and  extended  for  a period  of  fifty  years,  provided  for  a maximum 
rate  of  not  over  one  cent  per  lamp  hour  for  each  16  C.  P.  incandes- 
cent lamp,  and  that  three  per  cent  of  the  gross  earnings  be  paid  the 
City  annually,  beginning  five  years  from  the  beginning  of  operation 
of  the  plant. 

By  the  acquisition  of  three  competitors  serving  a territory 
north  and  west  of  the  Chicago  Edison  Company’s  territory,  the 
Commonwealth  Electric  Company  at  the  time  of  the  consolidation 
with  the  Chicago  Edison  Company  served  practically  the  entire 
city  with  the  exception  of  the  Chicago  Edison  territory,  as  stated 
above.  The  service  was  practically  all  alternating  current  fur- 
nished from  a modern  steam  turbine  generating  station  at  Fisk 
street  and  the  Chicago  River. 

Both  the  Chicago  Edison  and  the  Commonwealth  Electric  Com- 
panies acquired  by  purchase  practically  all  of  the  competing  com- 
panies which  were  started  from  time  to  time  within  their  terri- 
tory. The  names  of  these  acquired  properties,  together  with  the 
purchase  price  and  the  value  of  tangible  property  to  the  purchaser, 
as  determined  by  H.  M.  Byllesby  and  Company,  are  shown  in  the 
following  summary.  All  of  these  plants  with  the  exception  of  three, 
have  been  dismantled : 


11 


SUMMARY  OF  PROPERTIES  PURCHASED  BY  CHICAGO  EDISON  COMPANY. 


Date 

Pur- 

chased. 

Purchase 

Price. 

V alue  to 

Company  of  Phys- 
ical Property  at 
Time  of  Purchase. 

Amount  of  Pur- 
chase Price  Paid 
for  Good  Will 
and  Business. 

Chicago  Arc  Light  & Power  Co  — 

1892 

$2,196,000.00 

$1,195,000.00 

$1,000,000.00 

National  Electric  Con.  Co 

1894 

96,060.00 

10,000.00 

86,060.00 

Northwestern  El.  Lt.  & Power  Co... 

1894 

75,546.00 

13,500.00 

62,046.00 

Co-Operative  El.  Lt.  & Power  Co. 

1894 

131,081.00 

62,915.00 

68,166.00 

City  Illuminating  Co 

1894 

5,590.00 

1,500.00 

4,090.00 

Madison  Electric  Light  Co 

1894 

2,250.00 

350.00 

1,900.00 

W.  J.  Pagan  Plant  

1895 

2,000.00 

1,250.00 

750.00 

Dearborn  Lighting  Co 

1896 

5,316.00 

1,000.00 

4,316.00 

American  Gas  Engine  Co 

1896 

1,850.00 

1,850.00 

Chicago  Illuminating  Co 

1897 

95,641.00 

44,000.00 

51,641.00 

Allen  Plant  

1897 

12,000.00 

2,000.00 

10,000.00 

Gregory  Central  Station  Co 

1901 

16,000.00 

8,000.00 

8,000.00 

Laff  & Florsheim  Plant  

1901 

3,000.00 

500.00 

2,500.00 

L.  & P.  Baer  Plant  

1901 

3,000.00 

1,530.00 

1,470.00 

Merchants  Arc  Light  & Power  Co. 

1898 

25,000.00 

5,500.00 

19,500.00 

Archer  Avenue  Plant  

1898 

10,417.00 

4,500.00 

5,917.00 

Bachelle  Plant  

1898 

16,900.00 

10,000.00 

6,900.00 

Offerman  Plant 

1900 

3,100.00 

1,000.00 

2,100.00 

Consumers  El.  Lt.  & Power  Co 

32,315.00 

12,315.00 

20,000.00 

Murphy  Power  Co 

1899 

12,510.00 

2,000.00 

10,510.00 

Chicago  Light,  Heat  & Power  Co.. 

1900 

110,000.00 

2,750.00 

107,250.00 

Zenith  Plant  

1908 

27,000.00 

1,500.00 

25,500.00 

Sparr  & Weiss  

1904 

9,626.00 

3,500.00 

6,126.00 

Buell-McKeever  Plant  

1906 

36,260.00 

8,500.00 

27,750.00 

Miller  Plant  

1898 

29,575.00 

11,600.00 

17,975.00 

Seipp  Plant  

1903 

11,500.00 

2,000.00 

9,500.00 

Hardin  Plant  

5,000.00 

1,000.00 

4,000.00 

Sectional  Underground  Company 

Miscellaneous  

$2,973,527.00 

175,817.00 

27,080.00 

$1,409,560.00 

100,000.00 

$1,563,967.00 

75.817.00 

27.080.00 

Total  

$3,176,424.00 

$1,509, 560'.  00 

$1,666,864.00 

SUMMARY  OF  ORIGINAL  AND  PURCHASED  COMPANIES  OF 
COMMONWEALTH  ELECTRIC  COMPANY. 


Value  to 

Amount  of  Pur- 

Date 

Company  of  Phys- 

chase Price  Paid 

Pur- 

Purchase 

ical  Property  at 

for  Good  Will 

chased. 

Price. 

Time  of  Purchase. 

and  Business. 

Hyde  Park  Thomson-Houston  Co.| 
Hvde  Park  Electric  Licht  Co.  j- 

1897 

$ 278,935.00 

Englewood  Electric  Light  Co J 

Mutual  Electric  Co 1 

1897 

627,385.00 

Peoples  Light  & Power  Co } 

Western  Light  & Power  Co 

$2,126,000.00 

$ 906,320.00 

$1,218,680.00 

1897 

250,000.00 

193,945.00 

56,056.00 

West  Chicago  Light  & Power  Co... 

1897 

65,000.00 

42,280.00 

22,720.00 

Edgewater  Light  Company 

1897 

15,000.00 

9,200.00 

5,800.00 

Commonwealth  Electrio  'Co 

1897 

$2,455,000.00 

170,000.00 

$1,151,745.00 

$1,303,255.00 

170,000.00 

$2,625,000.00 

$1,151,745.00 

$1,473,255.00 

While  the  Commonwealth  and  the  Edison  companies  were  in 
theory,  at  least,  independent  of  each  other  prior  to  their  consoli- 
dation, they  were  controlled  and  operated  by  the  same  interests  and 
were  not  in  any  sense  competitors. 

GROWTH  OF  BUSINESS. 

The  growth  of  the  business  is  illustrated  by  tables  Nos.  2 and  3, 
showing  the  annual  financial  and  earning  statements  of  the  two 


12 


companies  up  to  the  time  of  the  consolidation,  and  table  No.  4, 
showing  the  statements  of  the  combined  companies  up  to  1912.  A 
statistical  compilation  prepared  from  combined  reports  as  published 
by  the  companies  is  found  in  table  No.  5,  and  the  information  con- 
tained therein  is  illustrated  in  diagrams  Nos.  1,  2 and  3.  Diagrams 
Nos.  4,  5 and  6 show  the  growth  in  connected  load,  kilowatt  hours 
produced  and  sold,  and  the  average  daily  load  curve  for  the  various 
years.  This  remarkable  growth  has  no  doubt  been  largely  due  to 
progressive  management  and  as  a result  the  Commonwealth  Edi- 
son Company  is  now  the  largest  electric  light  and  power  company 
in  the  world. 

The  following  table,  based  on  maximum  output,  shows  approx- 
imately the  proportion  of  all  electricity  distributed  in  Chicago  in 
1911  for  public  utility  purposes  and  for  public  consumption  as 


supplied  from  various  sources : 

Commonwealth  Edison  Company 73  per  cent 

Surface  street  railways 7 “ “ 

Elevated  railways 13  “ “ 

Sanitary  District  of  Chicago 5 “ “ 

Cosmopolitan  Electric  and  other  companies  2 “ “ 


100  per  cent 


' ■ 


TABLE  NO.  2.  CHICAGO  EDISON  COMPANY. 


13 


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Total  Liabilities  $2,469,805.  $ 7,197,828.  $ 7,769,520.  $ 8,054,681.  $ 9,171,075.  $10,061,152.  $10,595,152.  $11,555,341. 


TABLE  NO.  2 — Continued.  CHICAGO  EDISON  COMPANY, 


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TABLE  NO.  3.  COMMONWEALTH  ELECTRIC  COMPANY. 


15 


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Total  Liabiliities $ 7,595,196.  $ 7,788,536.  $ 8, ‘508, 032.  $ 9,303,965.  $10,753,968.  $13,449,958.  $14,505,275.  $17,088,149.  $20,970,057. 


16- A 


TABLE  NO.  5. — COMPARATIVE  DATA  BASED  ON  COMPANIES’  PUBLISHED  STATEMENTS. 


TABLE  NO.  4.  COMMONWEALTH  EDISON  COMPANY. 


16 


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17 


DIAGRAM  NO.  1. — INCREASE  IN  TOTAL  INVESTMENT  CONTRASTED  WITH 
INVESTMENT  NECESSARY  TO  PRODUCE  $1.00  OF  GROSS 
OR  NET  REVENUE. 


18 


DIAGRAM  NO.  2 GROWTH  OF  INCOME  AND  VARIATION  IN 

OPERATING  RATIO. 


19 


DIAGRAM  NO.  3. — DECREASE  OF  INVESTMENT  AND  INCOME  PER  CUS- 
TOMER, AND  GROWTH  OF  EARNINGS  AND  NUMBER 
OF  CUSTOMERS. 


S&UTloa  JO  - lsiOIJ.tJV3tJO  UJO&d 


20 


DIAGRAM  NO.  4. — GROWTH  IN  CONNECTED  LOAD, 


21 


DIAGRAM  NO.  5. — INCREASE  IN  TOTAL  OUTPUT  AND  CURRENT  SOLD  FOR 
RAILWAY,  LIGHT  AND  POWER  PURPOSES. 


DIAGRAM  NO.  6. — CURVES  SHOWING  KILOWATT  OUTPUT  FOR  THE  AVER- 
AGE DAY  OF  EACH  YEAR  SINCE  1900. 


VALUATION. 


The  fundamental  principles  and,  in  certain  instances,  the  laws 
on  which  rate  regulation  is  based  assume  that  in  return  for  the 
use  of  streets  and  other  franchise  privileges  the  public  utility  com- 
panies must  furnish  adequate  service  at  reasonable  rates,  or  such 
rates  as  will  earn  a fair  amount  on  the  invested  capital  necessary 
to  furnish  adequate  service.  Therefore,  it  is  a matter  of  para- 
mount importance  that  the  amount  of  this  investment,  which  may  be 
called  earning  or  service  value,  be  determined  with  great  care  to 
insure  justice  to  the  consumer  on  the  one  hand  and  to  the  investor 
on  the  other.  The  term  value  in  this  report  will  be  construed  to 
mean  value  for  rate  making  purposes. 

Some  of  the  different  methods  of  determining  value  that  have 
been  employed  in  the  past  are  as  follows : 

(a)  Outstanding  capitalization. 

( b ) Book  value. 

(c)  Market  value  of  securities. 

(d)  Original  cost. 

(e)  Original  cost  less  depreciation. 

(/)  Reproduction  cost. 

( g ) Reproduction  cost  less  depreciation. 

(a  and  b)  Outstanding  capitalization  and  book  value  are  de- 
termined from  company  records,  and  these  items  have  been  known 
in  some  cases  to  bear  a fictitious  relation  to  the  real  amount  of  capi- 
tal invested.  Though  the  original  books  are  accessible  they  may  not 
show  the  actual  construction  charges.  Subsequent  additions  to  the 
capital  account  may  not  represent  new  improvements  and  additions 
at  all,  but  may  really  represent  repairs,  renewals  or  replacements,  so 
that  the  books  would  not  show  the  true  value  of  the  existing 
property. 

(c)  In  addition  to  being  dependent  upon  the  two  above  fac- 
tors, the  market  value  of  securities  is  determined  largely  by  the 
earning  power  of  the  company.  The  earning  power  is  based  pri- 
marily on  the  rates  of  charge,  so  that  one  is  not  a proper  or  logical 
standard  of  measurement  for  the  other.  General  financial  condi- 
tions and  other  factors  also  are  to  a large  degree  responsible  for 
the  market  value  of  securities.  Therefore,  neither  outstanding 
capitalization,  book  value  nor  market  value  are  entitled  to  a great 
degree  of  consideration  in  determining  value  for  rate  making  pur- 
poses. However,  in  certain  instances  where  the  outstanding  cap- 
ital is  grossly  in  excess  of  the  physical  property,  the  former  must 
receive  due  consideration  if  the  securities  are  in  the  hands  of  the 
general  investing  public  who  have  paid  value  therefor,  as  future  de- 
velopment may  require  large  amounts  of  new  capital  which  could 
not  be  secured  if  the  rights  of  the  legitimate  investor  were  not 
recognized.  In  cases  of  this  nature  the  public  might  suffer  by  lack 
of  efficient  service  if  new  capital  could  not  be  obtained. 

( d and  e)  Original  cost,  meaning  actual  cost  of  the  original 
property  with  proper  allowances  for  subsequent  additions  and  de- 
ductions, should  be  given  careful  consideration  in  determining 


value,  providing  it  can  be  obtained  with  a reasonable  degree  of  ac- 
curacy. 

(/  and  g)  Cost  of  reproduction,  meaning  estimated  cost  of 
constructing  a hypothetical  duplicate  plant  at  the  present  time, 
seems  to  be  the  most  generally  accepted  basis  for  determining  value 
by  courts  and  public  service  commissions,  although  the  original 
cost  is  given  consideration  by  them  where  it  is  available.  The 
valuation  as  determined  either  by  the  original  cost  or  reproduction 
cost  may  be  reduced  by  the  accrued  depreciation  of  the  property. 
If  the  basis  of  reproduction  cost  is  strictly  adhered  to  in  deter- 
mining plant  value,  in  some  instances  the  figures  arrived  at  are  not 
reasonable,  as  hypothetical  conditions  must  be  assumed  which  did 
not  or  could  not  exist.  Accordingly,  if  reproduction  cost  is  the 
basis  of  valuation  it  must  be  modified  in  some  details. 

With  regard  to  the  most  generally  accepted  standards  of  val- 
uation, Whitten  in  his  “Valuation  of  Public  Service  Corporations” 
says : 

“Considered  from  all  points  of  view  the  method  of  reproducing 
the  existing  plant  under  the  actual  physical  and  other  conditions  un- 
der which  it  was  actually  constructed  seems  to  be  fair  to  both  par- 
ties. It  is  a rule  that  corresponds  to  the  actual  equities  of  the  par- 
ties, while  the  other  rule  (cost  of  reproduction)  gives  an  unfair  ad- 
vantage in  some  cases  to  the  public  and  in  other  cases  to  the  com- 
pany.” 

“The  courts  and  commissions  have  in  the  main  prudently 

refrained  from  disclosing  their  real  standard  of  value,  as  they  have 
realized  the  newness  of  the  subject  and  the  danger  of  creating  prece- 
dents that  may  compromise  future  action  when  the  entire  problem 
has  been  more  fully  disclosed.” 

BASIS  OF  VALUATION. 

In  this  investigation  the  basis  for  valuation  is  an  appraisal  of 
the  Commonwealth  Edison  Company’s  entire  property  made  by 
H.  M.  Byllesby  and  Company  under  date  of  June  1st,  1908.  A more 
recent  appraisal  is  about  to  be  completed  by  the  same  engineers, 
but  was  not  available  for  use  in  this  investigation.  The  figures  ob- 
tained from  the  1908  appraisal  were  used  by  the  Commonwealth 
Edison  Company  as  a basis  for  opening  its  books  at  the  time  of 
the  consolidation  of  the  Chicago  Edison  and  Commonwealth  Elec- 
tric Companies,  with  the  necessary  changes  to  correct  the  figures 
to  Sept.  17th,  1907,  the  date  of  the  consolidation.  The  original 
hooks  and  papers  of  the  Chicago  Edison  and  Commonwealth  Elec- 
tric Companies  and  all  acquired  properties  prior  to  the  formation 
of  the  present  company  were  destroyed  in  accordance  with  a resolu- 
tion adopted  by  the  Executive  Committee  of  the  Company  on  March 
7th,  1911.  Thus  it  is  impossible  to  verify  any  of  the  appraisal  figures 
from  the  original  books.  The  unit  costs  employed  by  Byllesby  & Com- 
pany are  liberal  and  appear  in  a number  of  instances  to  be  in  ex- 
cess of  the  actual  construction  cost.  On  account  of  the  length  of 
time  and  vast  amount  of  work  necessary  to  check  these  figures  in 
detail  it  was  necessary  to  accept  them  as  a basis  for  this  report, 
with  some  modifications  as  shown  in  detail  later.  The  books  and 
records  of  the  Company,  which  are  very  complete  since  September 


17th,  1907,  were  used  to  bring  the  investment  figures  down  to  the 
date  of  June  30th,  1911.  This  date  is  assumed  as  showing  the  fair 
average  investment  for  the  year  1911.  Letter  of  transmissal  ac- 
companying the  appraisal  of  H.  M.  Byllesby  & Company  is  here  ap- 
pended in  order  to  show  exactly  on  what  basis  the  appraisal  was 
made,  followed  by  an  explanation  of  the  methods  used  in  obtaining 
the  valuation. 


Chicago,  III.,  September  10th,  1908. 
Commonwealth  Edison  Company.  Chicago.  Illinois: 

Dear  Sirs  : — 

In  accordance  with  your  request  we  have  prepared  a valuation  of  your 
property  as  of  June  1st,  1908.  This  report  deals  specifically  with  the  fol- 
lowing divisions  of  valuation  only: 

1.  The  existing  physical  property. 

2.  The  “good  will”  of  acquired  properties. 

3.  The  cost  of  developing  the  connected  load  of  the  system. 

We  have  not  dealt  specifically  in  this  report  with  any  question  of  the 

franchises  of  the  Commonwealth  Edison  Company,  nor  their  value,  as  this 
was  not  included  within  its  scope. 

We  have  not  included  in  this  report  the  value  of  the  property  that 
has  been  abandoned  before  its  life  had  expired  from  such  causes  as  anti- 
quation  or  outgrowth,  or  changes  in  the  art  of  distribution  or  generation, 
nor  from  other  well  known  causes  arising  out  of  public  and  private  wel- 
fare and  safety.  This  can  only  be  arrived  at  through  historical  data,  but 
from  information  afforded  us  in  the  prosecution  of  our  work  we  believe 
this  to  be  of  large  dimensions. 

We  began  this  work  in  March  of  this  year  and  have  been  steadily  en- 
gaged upon  it  with  a force  of  engineers  and  appraisers  under  the  direct 
supervision  of  Mr.  Thomas  H.  Creden,  of  our  company.  Owing  to  the 
magnitude  of  your  property  and  the  extent  of  its  business,  this  has  nec- 
essitated the  employment  of  a large  force,  although  our  work  has  been 
greatly  facilitated  by  the  completeness  of  the  records  and  the  unusually 
high  physical  condition  of  all  parts  of  your  property,  and  the  fact  that 
Mr.  Creden  had  been  in  the  employ  of  your  company  from  1893  to  1900, 
having  consequently  a familiarity  with  your  property  and  its  development 
during  that  period,  which  has  been  of  the  highest  value  in  despatching 
the  work. 

In  arriving  at  the  figures  submitted  herewith,  a detailed  inventory 
has  been  made  which  is  not  annexed  to  this  report,  owing  to  its  great 
volume,  but  which  is  delivered  in  the  form  of  a separate  document. 

Great  care  has  been  given  in  formulating  the  methods  adopted  in 
making  this  report  and  arriving  at  the  values  given;  our  detailed  reasons 
will  be  found  in  the  body  of  the  report. 

Briefly,  the  physical  valuations  have  been  made  as  follows: 

Only  the  now  existing  physical  property  has  been  included  under  that 
heading.  Tn  arriving  at  its  valuation  the  date  at  which  the  various  por- 
tions of  the  property  were  purchased  or  acquired  and  put  into  commis- 
sion has  been  carefully  ascertained  from  the  records  of  your  company  and 
from  historical  knowledge  and  information  found  available;  by  co-opera- 
tion with  manufacturers  we  have  been  enabled  to  determine  the  cost  price 
of  all  of  the  apparatus  and  equipment  at  the  various  dates  when  it  was 
acquired  or  constructed.  To  the  figures  so  obtained  we  have  added,  from 
the  best  information  obtainable  and  from  our  own  experience,  the  sup- 
plementary cost  of  completely  installing,  building  and  erecting  and  put- 
ting into  commission  the  apparatus  for  the  various  parts  of  your  system, 
including  superintendence.  To  this  cost  has  been  added  the  customary 
charge  of  5%  for  engineering  and  one-half  of  one  per  cent,  for  insurance 
against  fire  and  accident  liability  to  employes  and  the  public. 

To  the  foregoing  cost  we  have  added  the  following  percentages  suc- 
cessively : 1 


Five  per  cent  to  cover  the  cost  of  organization,  legal  expenses,  ex- 
penses incident  to  corporation  of  the  company  and  similar  items. 

Six  per  cent  for  interest  during  construction.  This  covers  interest 
carrying  charges  upon  money  employed  in  building  or  adding  to  the  plants 
and  system  of  the  company,  from  time  to  time  and  while  such  additions 
to  the  property  were  not  producing  revenue.  Tn  the  absence  of  any  en- 
tirely definite  figures  on  this  subject,  but  after  a full  consideration  of  the 
history  of  this  company's  building  operations,  we  have  estimated,  and  we 
believe  conservatively,  that  the  total  interest  during  construction  would 
be  represented  by  Q%  for  one  year  upon  the  cost  value  of  the  physical 
property  expressed  above. 

We  have  finally  added  to  the  foregoing  a charge  of  5%  as  represent- 
ing what  we  believe  would  normally  have  been  the  brokerage  charges  for 
the  obtaining  of  the  capital  from  time  to  time  for  the  building  of  this 
property. 

From  the  cost  value,  including  engineering  and  insurance  charges, 
we  have  deducted  depreciation,  as  set  forth  in  the  subsequent  detailed 
portion  of  this  report;  this  depreciation  is  computed  from  well  known  or 
assumed  life  for  the  different  materials  and  equipment  of  your  company, 
and  from  the  periods  of  time  that  such  materials  and  equipment  have 
been  installed,  which  periods  of  time  have  been  determined  from  your 
records  and  other  sources  of  information.  We  have  not  permitted  the 
high  up-keep  of  your  physical  property  to  influence  these  depreciation 
amounts,  except  in  the  case  of  certain  special  classes  of  apparatus,  and 
the  total  amount  of  depreciation  is  rather  over  than  underestimated.  Tn 
estimating  depreciation  amounts  as  we  have,  we  have  assumed  that  a de- 
preciation fund  is  set  aside  or  invested  in  additions  to  your  property,  to 
cover  accrued  annual  depreciation  amounts. 

We  have  given  a value,  as  set  forth  in  our  report,  to  the  item  of 
“Good  will”  of  acquired  properties.  The  reasons  therefor  and  the  methods 
of  arriving  at  the  same  are  fully  set  forth  in  detail  in  a subsequent  por- 
tion of  this  report.  Briefly,  this  item  is  the  difference  between  the  price 
which  your  company  paid  from  time  to  time  for  companies  either  in  di- 
rect competition  or  in  a position  for  prospective  competition,  and  the 
computed  value  of  the  useful  physical  property  acquired  in  such  pur- 
chase. We  consider,  for  reasons  stated  in  the  body  of  this  report,  that 
this  is  a proper  item  of  cost  entering  into  the  proper  valuation  of  your 
company  as  a going  concern. 

The  item  of  “New  Business”  is  the  amount  reported  to  us  by  your- 
selves spent  in  addition  to  your  regular  operating  force,  for  comprehensive 
educational  campaigns  conducted  by  your  company  for  the  purpose  of  im- 
mediately increasipg  your  remunerative  business.  The  items  entering 
into  this  are  advertising,  personal  solicitation  and  canvassing,  exhibitions 
and  demonstrations  and  concessions  on  the  cost  of  wiring  consumers’ 
premises  in  certain  cases.  These  expenditures  have  brought  to  your  com- 
pany a permanently  remunerative  business  long  in  advance  of  the  period 
when  it  would  have  been  reached  without  these  expenditures.  This  is 
treated  in  detail  in  the  body  of  the  report. 

Respectfully  submitted, 

H.  M.  Byllesby  & Company. 

By  H.  M.  Byllesby, 

President . 


METHODS  USED  IN  OBTAINING  PHYSICAL  VALUATION. 

“In  determining  this  valuation,  the  widest  consideration  has  been 
given  to  the  nature  of  the  actual  development  of  the  properties  from 
their  small  beginnings  and  that  it  was  impossible  at  the  outset  to 
forecast  the  growth  of  the  load  with  any  certainty  and  that  as  a re- 
sult the  property  has  been  of  gradual  growth. 

“Furthermore,  the  business  had  to  be  taken  upon  the  lines  and 
served  as  it  developed  whether  in  Winter  or  in  Summer,  and  accord- 


27 


ingly  often  times  under  severe  conditions  of  frost,  that  the  under- 
ground system  in  the  main  part  of  the  city  has  had  to  be  laid  against 
the  greatest  obstacles  and  often  times  occasioned  the  protection  of 
other  mains  and  systems  in  the  streets  and  not  infrequently  the  re- 
moval or  changing  position  of  such  obstructions.  These  necessarily 
have  occasioned  very  large  costs. 

“Furthermore,  it  must  be  understood  that  the  lines  laid  under 
one  street  today  have  not  been  the  result  of  one  single  piece  of  con- 
struction, but  numerous  pieces  of  construction,  occasioning  repeated 
excavations  at  the  same  point  with  the  attendant  recurring  repaving 
charges  and  other  large  expense  from  the  above  mentioned  causes. 

“The  same  general  statement  applies  to  plant  construction,  where 
it  was  impossible  to  forecast  the  growth  of  the  load,  and  with  the 
continual  changes  and  improvements  in  the  art,  additions  were  put 
in  at  much  greater  cost  than  they  would  if  they  had  to  be  put  in,  in 
total,  as  a single  piece  of  work. 

“At  the  outset  of  the  work,  we  organized  departments  and  pro- 
ceeded to  verify  the  existence  of  the  property  by  an  actual  physical 
examination.  In  the  instance  of  buildings,  engineering  plans  and 
photographs  taken  during  the  process  of  construction  were  resorted 
to.  All  essential  measurements  were  taken  of  the  buildings  and  then 
estimates  of  the  quantities  of  material  and  cost  thereof  were  made  and 
prepared  by  men  of  experience. 

“In  the  instance  of  overhead  lines,  inspection  was  made  of  poles, 
wires  and  transformers  to  determine  beyond  doubt  the  existence  of 
the  property  as  represented  upon  the  maps  and  records  of  the  com- 
pany and  estimates  were  prepared  therefrom. 

“In  the  instance  of  generating  stations  and  sub-stations,  not  only 
plans  were  resorted  to,  but  inspection  was  made  of  all  machinery  and 
apparatus  contained  in  such  generating  stations.  The  sub-stations  in 
all  of  their  details  were  treated  in  manner  similar  to  the  generating 
stations. 

“In  the  instance  of  underground  work,  because  of  its  conceal- 
ment and  hence  absolute  physical  inability  to  obtain  visual  proof  of 
its  existence  throughout,  well  known  electrical  methods  were  re- 
sorted to  to  determine  its  existence. 

“In  treating  meters,  arc  lamps  and  signs  and  similar  parts  of  the 
property,  inspection  was  made  to  sufficient  extent  and  under  such 
circumstances  as  to  leave  no  doubt  whatever  of  the  existence  of  the 
property. 

“Inspection  was  likewise  made  of  all  the  movable  tools,  labora- 
tory apparatus,  horses,  wagons  and  other  material  and  property  of 
the  company.  Special  services  of  experts  were  made  available  in  de- 
termining the  valuations  upon  horses,  automobiles  and  such  prop- 
erty as  might  leave  doubt  in  our  minds  as  to  their  correct  value. 

“For  the  purpose  of  appraising  the  real  estate  and  certain  minor 
buildings,  including  dwellings,  the  services  of  two  real  estate  experts 
were  engaged,  and  the  valuations  given  by  them  have  been  included 
in  our  report. 

“Bids  and  prices  were  obtained  by  the  department  heads  and  a 
special  department  was  organized  to  obtain  prices  and  costs. 

“We  found  in  general  that  the  records,  plans  and  maps  of  the 
company  were  kept  up  in  a high  state,  although  we  found  certain  in- 
stances, in  underground  work  and  overhead  work,  where  the  maps 
of  the  company  in  reality  were  not  always  up  to  date  and  underesti- 
mated the  amount  of  property  actually  in  existence,  and  field  books 
were  then  resorted  to. 

“After  the  verification  of  the  existence  of  the  physical  property, 
values  were  placed  on  all  the  items  and  all  calculations  and  estimates 
and  map  measurements  were  checked.  Prices  were  established  as 
those  prevailing  at  the  time  the  property  was  built. 

“On  account  of  the  very  remarkable  recent  growth  of  your  com- 


28 


pany,  which  has  been  mentioned,  the  work  of  arriving  at  such  prices 
was  simplified. 

“In  the  main,  we  found  that  your  property  was  to  the  widest  de- 
gree extremely  new,  as  is  illustrated  by  the  following  figures : 

“We  found  by  the  assistance  of  your  records  that  the  average  age 
of  meters  now  in  use  was  three  and  one-half  years,  that  of  arc  lamps 
now  in  use  five  years;  the  overhead  distribution  system  was  only 
three  to  four  years  old  and  the  underground  distribution  system  an 
average  of  approximately  four  to  six  years  old;  the  sub-station  equip- 
ment averaged  only  two  and  one-half  years;  all  the  foregoing  being 
based  upon  the  costs  of  various  portions  put  in  from  year  to  year. 
This  fact  has  been  brought  about,  as  stated  in  the  foregoing,  by  the 
remarkable  growth  of  the  company  in  recent  years.  As  a natural 
consequence  the  great  preponderance  of  generating  capacity  in  sta- 
tions is  correspondingly  new. 

“The  Fisk  street  station,  the  largest  of  your  generating  stations, 
was  put  into  commission  about  4 904,  and  then  only  in  small  part, 
and  its  final  capacity  was  completed  in  the  year  1907. 

Depreciation: 

“In  treating  this  subject,  we  have  regarded  it  as  meaning  the 
wearing  out  through  use,  notwithstanding  proper  maintenance,  of 
any  part  of  your  physical  property,  and  we  have  followed  this  course 
throughout,  except  in  the  case  of  meters,  arc  lamps  and  signs,  where 
we  have  had  regard  to  their  unusual  upkeep,  which  has  resulted  on 
the  average  in  a practical  recent  reconstruction. 

“Following  this  definition,  we  have  placed  depreciation  amounts 
against  the  various  items  of  your  property  as  shown  on  the  detailed 
sheets  following,  and  which  in  total  have  been  deducted  from  the  cost 
plus  its  engineering  and  insurance  charge. 

“Owing  to  the  unusually  fine  maintenance  of  this  company,  the 
accrued  depreciation  given  is  amply  sufficient. 

“The  foregoing  method  of  verification  of  individual  departments 
of  the  property  and  the  details  of  depreciation  are  set  forth  fully  in 
the  following  pages.” 

Attention  is  drawn  to  the  fact  that  the  appraisal  with  few  ex- 
ceptions was  made  on  the  basis  of  original  cost  rather  than  repro- 
duction cost,  the  object  of  the  appraisal  being  to  determine  the 
capitalization  of  the  new  company.  Exceptions  were  made  in  the 
cases  of  real  estate  and  paving  over  conduits,  which  were  appraised 
on  the  basis  of  reproduction  cost,  in  both  cases  resulting  in  increased 
value. 

SUMMARY  OF  VALUATION  “1908”  H.  M.  BYLLESBY  AND  COMPANY. 


Real  estate  and  leaseholds.  $ 
Miscellaneous  buildings  .... 
Adams  street  office  building. 
Fisk  street  power  station... 
Harrison  street  power  station 
(including  battery)  . . 

Washington  street  power 

station 

Fifty-sixth  and  Wallace 

streets  power  station.  . . 
No.  Clark  street  power  sta- 
tion   

Sub-stations  (including 

buildings)  

Storage  batteries  (Harrison 
street  not  included) .... 


Cost.  Depreciation. 


2,576,634.00 

149.886.00 

492.268.00 
8,147,925.36 

3,387,866.17 

$ 637,765.05 

861,982,25 

253,984.15 

814,140.49 

136,002.36 

50,812.04 

18,996.11 

4,263,187.00 

225,038.00 

2,044,432.00 

Net  Value. 

$ 2,576,634.00 

149.886.00 

492.268.00 
8,147,925.36 

2,750,101.12 

607,998.10 

678,138.13 

31,815.93 

4.038.149.00 

2.044.432.00 


29 


Cost. 

Underground  system  11,742,174.00 

Overhead  system  2,816,673.00 

Meters  (customers)  2,767,030.43 

Arc  lamps  292,436.78 

Signs  310,967.48 

Incandescent  lamps  340,981.29 

Automobiles,  horses,  wagons, 

etc 103,062,00 

Repair  shop  equipment 48,037.00 

Movable  tools  16,671.00 

Laboratory  equipment  27,749.00 

Office  furniture  and  fixtures  108,209.70 

Supplies  and  material  on 

hand 677,413.47 


Depreciation. 

1,650,294.00 

469,369.00 

138,351.50 

43,865.50 

31,096.74 


33,158.00 


Net  Value. 
10,091,880.00 
2,347,304.00 
2,628,678.93 

248.571.28 
279,870.74 

340.981.29 

69.904.00 

48.037.00 

16.671.00 

27.749.00 
108,209.70 

677,413.47 


$42,040,538.46 


$3,637,920.41  $38,402,618.05 


TOTAL  PHYSICAL  VALUATION  INCLUDING  REAL  ESTATE,  LEASEHOLDS 
AND  BUILDINGS.  H.  M.  BYLLESBY  AND  COMPANY. 


Cost.  Depreciation.  Net  Value. 

Total  physical  value,  includ- 
ing engineering  and  in- 
surance charges  $42,040,538.46  $3,637,920.41  $38,402,618.05 

Five  per  cent  for  organiza- 
tion, legal  expense,  in- 
corporation charges, 
fees,  general  incidental 

and  general  contingencies  2,102,026.92  


Total $44,142,565.38 

Six  per  cent,  for  interest 

carrying  charges  2,648,553.92 


Total  $46,791,119.30 

Five  per  cent,  for  brokerage 

charges 2,339,555.96 


Total  $49,130,675.26  $3,637,920.41  $45,492,754.85 

FINAL  RECAPITULATION  OF  VALUATION.  H.  M.  BYLLESBY  AND  COMPANY 

Cost.  Depreciation.  Net  Value. 

Physical  valuation  $49,130,675.26  $3,637,920.41  $45,942,754.85 

‘Unfinished  plant,  invest- 
ment as  of  June  1,  1908  473,055.63  

“Good  Will”  of  acquired 

property  3,721,261.00  

Cost  of  getting  business  upon 

system  2,169,700.00  


Total  of  valuations  speci- 
fically covered  by  this 

report $55,494,691.89  $3,637,920.41  $51,856,771.48 

*As  reported  by  your  company. 

OVERHEAD  CHARGES. 

In  all  engineering  appraisals  it  is  customary  and  proper  to 
add  certain  percentages  to  the  estimated  cost  of  the  labor  and 
material,  in  order  to  arrive  at  the  actual  total  cost  of  the  property  at 


30 


the  time  it  was  placed  in  service.  These  extra  charges  are  gen- 
erally intended  to  cover  engineering  and  architects’  fees,  fire  and 
liability  insurance,  interest  on  the  investment  during  construc- 
tion, and  contractor’s  profit  on  the  portion  of  the  work  not  done  by 
the  company  itself.  A percentage  is  also  added  to  cover  possible 
omissions  in  the  appraisal,  contingencies,  legal,  organization  and 
incidental  expense,  and  all  other  proper  items  of  overhead  expense. 

In  the  appraisal  by  Byllesby  & Company  the  following  over- 
head charges  were  added  to  material  and  labor  costs  in  all  cases 
where  the  construction  work  was  done  by  the  company  and  to  the 
contract  prices  wherever  work  was  done  by  contractors. 

5 per  cent  for  engineering  and  architect’s  fees. 
i/2  per  cent  for  insurance  during  construction. 

5 per  cent  for  legal,  organization  and  incidental  expenses. 

6 per  cent  for  interest  during  construction. 

5 per  cent  for  brokerage. 

In  the  case  of  real  estate  the  first  5%  per  cent  was  not  added, 
while  to  the  cost  of  sub-station  equipment  a 10  per  cent  engineer- 
ing fee  was  added.  These  percentages  are  added  successively  and 
constitute  a total  overhead  charge  of  about  23.6  per  cent  on  the 
base  cost  (which  includes  contractor’s  profit)  of  the  physical  prop- 
erty. 

While  the  same  primary  costs  were  assumed  as  a basis  for  this 
report,  the  percentages  added  for  overhead  charges  are  as  fol- 
lows : 

5 per  cent  for  engineering  and  architect’s  fees. 

1/2  per  cent  for  insurance  during  construction. 

5 per  cent  for  organization,  legal  and  contingent  expenses. 


IOV2  per  cent. 

Six  per  cent  interest  during  construction,  which  is  added  suc- 
cessively to  the  above  10 1/2  per  cent,  making  about  17  per  cent. 
These  percentages  were  added  only  on  construction  items. 

In  the  case  of  real  estate,  6 per  cent  was  the  only  addition, 
and  7 per  cent  in  the  case  of  customers’  meters,  arc  lamps, 
signs  and  unclassified  district  installations,  which  include  horses, 
wagons,  automobiles,  furniture,  incandescent  lamps,  repair  shop 
and  laboratory  equipment.  The  total  overhead  percentage  on  this 
basis  is  approximately  15.4  per  cent  of  the  original  estimated  cost, 
as  of  September  17th,  1907. 

In  the  base  cost  in  both  of  the  above  cases  is  included  sub-con- 
tractors’ profits  on  all  buildings  and  steam  equipment  in  the  gen- 
erating stations  and  on  approximately  two-thirds  of  the  under- 
ground conduit,  which  represents  the  work  actually  done  by  con- 
tract. Considering  the  base  cost  to  be  exclusive  of  contractor’s 
profit,  the  total  overhead  charge  would  be  approximately  18.5  per 
cent  instead  of  15.4  per  cent.  These  allowances  are  deemed  fair  to 
the  company. 

Since  the  1908  appraisal  the  actual  engineering  and  other 
proper  overhead  charges  on  new  construction  work  have  been 


31 


included  by  the  company  in  capital  investment  except  that  no  allow- 
ance has  been  made  for  interest  during  the  construction  period.  In 
bringing  the  investment  figures  down  to  June  30th,  1911,  an  addi- 
tion of  3 per  cent  of  the  book  cost  has  been  allowed  on  all  new  con- 
struction items  since  the  appraisal  as  interest  carrying  charge. 

Reference  to  various  appraisals  made  of  utility  properties 
for  taxation  and  rate  making  purposes  discloses  a variation  of 
from  6 per  cent  to  more  than  30  per  cent  in  the  amount  of  over- 
head charges.  This  wide  variation  is  partly  due  to  the  different 
conditions  existing  in  each  case  and  partly  to  the  varied  opinions 
of  the  appraisers,  so  that  comparisons  are  not  necessarily  con- 
clusive or  applicable  to  the  local  conditions.  In  some  instances 
the  bare  labor  and  material  only,  constitute  the  base  cost  to  which 
contractor’s  profit  is  added  as  an  item  of  overhead  expense,  while 
in  other  cases,  as  in  the  one  under  discussion,  contractor’s  profit, 
where  such  is  actually  paid  out  by  the  company,  is  included  in  the 
base  cost. 

In  a large  number  of  rate  cases  in  which  overhead  charges 
have  been  given  careful  consideration  a total  of  12  per  cent  is 
allowed  for  electric  as  well  as  gas  properties,  which  is  apportioned 
as  follows:  5 per  cent  for  engineering  and  superintendence,  4 
per  cent  for  interest  during  construction,  3 per  cent  for  legal,  or- 
ganization and  contingencies.  The  following  illustrates  the  over- 
head percentages  in  several  important  valuations : 

Per  Cent. 

Chicago  City  Railways,  by  the  Traction  Valuation  Commission,  1906 


(including  brokerage)  21.7 

Columbus  (Ohio)  Railway  and  Light  Company  (electric),  by  U.  S.  Cir- 
cuit Court,  report  of  Special  Master,  1906 9.8 

Minnesota  R.  R.,  appraisal  by  Minnesota  R.  R.  & Warehouse  Commis- 
sion, 1908  17.7 

Northern  Pacific  Railway,  by  Washington  R.  R.  Commission,  1908. ...  5.8 

Lincoln  (Neb.)  Gas  & Electric  Light  Company  (gas),  by  U.  S.  Court, 

182  Fed.  Rep.  926,  223,  U.  S.  349,  359,  1909 7.7 

Chicago  Consolidated  Traction  Company,  by  B.  J.  Arnold  and  George 

Weston,  1910  20.4 

Puget  Sound  Electric  Railway,  by  Washington  R.  R.  Commission,  1910  15.7 
South  Dakota  R.  R.,  appraisal  by  the  Board  of  R.  R.  Commissioners 

of  South  Dakota,  1910 13.7 

Consolidated  Gas  Company  of  Long  Branch,  by  the  Board  of  Public 

Utility  Commissioners  (N.  J.),  1911 12.0 

"Kings  County  Lighting  Company  (gas),  by  New  York  Public  Service 

Commission,  First  District,  1911 27.1 

"Queensboro  Gas  & Electric  Company,  by  New  York  Public  Service 

Commission,  First  District,  1911 31.3 

Peoples  Gas  Light  & Coke  Company,  by  W.  J.  Hagenah,  1911 17.0 

Peoples  Gas  Light  & Coke  Company,  by  Edw.  W.  Bemis,  1911 17.0 

Union  Electric  Light  & Power  Company  (St.  Louis),  by  St.  Louis 

Public  Service  Commission,  1911 10.8 

Chicago  Elevated  Railways  (City  valuation),  1912 18.0 

Consolidated  Gas  Electric  Light  & Power  Company  of  Baltimore,  by 

the  Public  Service  Commission  of  Maryland,  1912 29.5 

The  Milwaukee  Electric  Railway  & Light  Company,  by  Wisconsin 

R.  R.  Commission,  1912 12.0 

Public  Service  Gas  Company  (Passaic  Division),  by  the  Board  of  Pub- 

lic  Utility  Commisioners  (N.  J.),  1912 17.6 

"Includes  an  allowance  for  development  of  the  business. 


BROKERAGE. 


Brokerage  or  discount  on  securities  suffered  in  obtaining  cap- 
ital is  unquestionably  a necessary  expense  in  financing  any  under- 
taking. Until  recently  it  has  been  customary  to  include  it  in  the 
permanent  capital  account  of  public  utility  companies. 

Brokerage  on  stock  when  charged  to  plant  account  introduces 
fictitious  values  in  the  capital  assets  and  accordingly  is  not  a proper 
item  for  capitalization,  but  in  considering  capital  liabilities  and 
circumstances  attending  their  issuance,  it  should  be  given  proper 
weight  in  determining  the  rate  of  return  to  be  allowed. 

Discount  on  bonds  is  not  a proper  capital  item  for  the  same 
reason.  Furthermore,  bonds  must  be  refunded  at  some  future 
time  and  a discount  again  capitalized,  might  in  the  course  of  years 
fictitiously  represent  a considerable  proportion  of  the  assets.  The 
proper  treatment  of  bond  discount  is  to  charge  to  suspense  when 
incurred  and  by  annual  charges  to  earnings  provide  for  amortiza- 
tion over  a period  not  longer  than  the  life  of  the  bonds.  This  is 
the  present  practice  of  the  Commonwealth  Edison  Company. 

The  brokerage  charge  might  properly  be  a comparatively  large 
percentage  of  the  securities  outstanding  in  the  case  of  a small 
company  organized  in  the  infancy  of  the  electric  lighting  and  power 
industry,  but  as  the  business  becomes  more  stable  and  has  a recog- 
nized earning  power  such  as  this  company  has,  the  discount  neces- 
sary to  secure  additional  funds  decreases,  so  that  as  the  plant  grows 
the  brokerage  represents  a constantly  decreasing  percentage  of 
the  whole  investment.  The  Commonwealth  Edison  Company  has 
had  no  brokerage  charge  on  its  stock  for  some  years  past,  as  the 
stockholders  have  been  very  desirous  of  securing  more  stock  at  its 
par  value,  whenever  the  opportunity  was  afforded.  The  brokerage 
on  its  bonds  should  properly  be  small,  as  they  sell  at  a premium 
and  at  a higher  price  than  the  bonds  of  most  of  the  other  Chicago 
public  utilities.  Accordingly,  no  allowance  has  been  made  for 
brokerage  in  determining  the  capital  investment,  but  an  amount 
is  included  in  operating  expense  to  represent  the  annual  allowance 
for  amortization  of  bond  discount. 

PAVING. 

The  item  of  paving  over  conduit  and  Edison  tube  was  ap- 
praised by  Byllesby  & Company  at  $1,541,284.54  on  the  basis  of 
reproduction  cost,  including  all  overhead  charges,  which  is  about 
21.9  per  cent  of  the  total  appraised  cost  of  these  items.  This  figure 
includes  valuation  of  all  paving  existing  over  conduit  whether  the 
same  was  actually  cut  through  and  replaced  by  the  company  or  not. 

Decisions  by  the  courts  and  public  service  commissions  have 
with  few  exceptions  excluded  from  valuation  for  rate  purposes 
the  value  of  pavement  not  actually  paid  for  by  the  company. 

Commissioner  Maltbie  in  Mayhew  v.  Kings  Co.  Lighting  Co., 
2 P.  S.  C.  1st  D.  (N.  Y.),  decided  October  20th,  1911,  is  quoted  as 
follows : 

“The  practical  effects  of  such  a theory  are  interesting  and  im- 


33 


portant.  Suppose  a locality  at  the  time  a gas  company  was  started 
and  its  pipes  laid  were  content  to  have  unpaved  or  cheaply  paved 
streets,  cobblestone,  macadam  or  gravel  being  used.  Suppose  that 
the  people  come  to  demand  better  paving,  being  dissatisfied  with 
earlier  conditions,  and  that  asphalt,  brick  or  granite  block  with  a 
concrete  base  is  laid  throughout  the  area.  Naturally,  the  people  ap- 
preciate that  they  must  pay  the  cost  of  the  re-paving;  but  according 
to  the  theory  of  counsel  for  the  company,  the  gas  consumer  must 
also  pay  more  for  gas.  In  other  words,  every  time  the  streets  are  im- 
proved, not  only  do  taxes  or  assessments  go  up,  but  higher  gas  rates 
are  justified,  notwithstanding  the  fact  that  the  company  may  not  have 
paid  one  dollar  in  connection  therewith.  If  this  theory  is  correct, 
citizens  must  consider  in  connection  with  every  civic  improvement  its 
effect  upon  rates  for  gas,  electricity,  telephone  service,  water,  trans- 
portation and  every  other  service  which  involves  the  use  of  the  sub- 
surface of  the  streets.  If  such  improvement  increases  the  cost  of  re- 
producing the  undertaking  supplying  such  service,  higher  rates  will 
thereby  be  justified  than  would  be  reasonable  before  such  improve- 
ment is  made. 

“Applying  the  theory  of  counsel  to  the  case  in  hand,  he  asks  that 
in  toto  about  $250,000  or  $300,000  be  added  in  determining  the  ‘fair 
value’  of  the  property,  such  sum  including  not  merely  the  net  cost  of 
the  paving,  but  ‘overhead  charges’  amounting  to  20  per  cent,  or  there- 
abouts. A return  of  10  per  cent,  thereon  would  be  from  $25,000  to 
$30,000.  Upon  the  basis  of  actual  sales  for  1910,  this  is  equivalent  to 
from  4 to  5 cents  per  thousand.  Thus  the  net  result  of  counsel’s 
theory  is  that  this  Commission  is  asked  to  fix  a rate  higher  by  4 or  5 
cents  than  would  otherwise  be  reasonable,  and  the  reason  offered  in 
essence  is  that  since  the  Kings  County  Company  laid  its  mains  and 
services  the  City  of  Brooklyn  and  later  the  City  of  New  York  has  ma- 
terially improved  the  paving  over  those  pipes  without  expense  to 
the  company.” 

“The  company’s  counsel  apparently  relies  upon  a single  thesis  to 
maintain  his  theory.  He  may  not  claim  that  the  pavement  is  the 
property  of  the  company,  for  it  is  not  in  any  degree.  The  company 
may  not  alter  the  pavement  without  the  city’s  permission,  nor  sell, 
transfer  or  remove  it,  and  in  case  the  company  does  take  up  its  pipes 
and  leave  the  street,  the  pavement  must  be  restored.  Secondly,  the 
company  did  not  lay  the  new  paving.  It  was  laid  by  the  city  after  the 
company’s  pipes  were  in  the  ground.  In  the  third  place,  the  new 
paving  represents  no  expenditure  upon  the  part  of  the  company. 
This  fact  is  important,  for  it  is  conceivable  that  a company  might  not 
own  certain  property,  might  not  have  actually  constructed  it,  and  yet 
the  expense  of  such  construction,  if  paid  by  the  company,  might  prop- 
erly be  included  in  the  amount  upon  which  the  company  woul<UT>e 
entitled  to  earn  a fair  return.  But  in  this  case,  the  new  pavement 
under  discussion  does  not  represent  any  investment  or  expenditure 
by  the  company.  The  relaying  of  the  original  paving  does  ahd  it  has 
been  included  in  ‘net  cost,’  as  above  set  forth. 

“If  one  were  to  estimate  the  cost  to  reproduce  as  new  the  prop- 
erty that  exists  today,  the  present  paving  would  have  to  be  replaced 
when  the  streets  were  opened  for  the  laying  of  mains  and  services. 
Apparently  this  is  the  only  basis  upon  which  the  company’s  contention 
is  founded.  The  cost-of-reproduction  method  may  be  the  only  method 
which  can  be  used  in  some  instances,  but  to  follow  it  to  the  last  ex- 
tremity in  all  cases,  ignoring  all  other  considerations,  not  only  leads 
to  absurd  conclusions,  but  runs  counter  to  judicial  decisions. 

“There  are  two  other  arguments  that  have  not  been  submitted 
in  this  case,  but  to  which  reference  should  be  made  in  this  discus- 
sion. One  is  that  if  a competing  company  were  to  build  a gas  system, 
it  would  be  obliged  to  pay  for  the  existing  pavement  over  its  mains 
and  services,  as  it  would  have  to  replace  it  during  construction. 
True!  But  does  it  follow  that  gas  rates  would  in  practice  be  based 


34 


upon  the  cost  of  the  most  expensive  service?  Even  the  maximum  to 
be  fixed  by  law  would  not  of  necessity  be  based  upon  the  cost  of  the 
most  expensive  service.  However,  this  argument  is  irrelevant  be- 
cause it  is  the  policy  of  this  State  that  public  regulations  of  rates 
should  take  the  place  of  competition  and  that  unnecessary  duplication 
of  plant  shall  be  avoided.  The  State  is  to  protect  the  consumer  against 
unreasonable  rates.  But  if  the  State  must  fix  rates  upon  the  basis  of 
competitive  supply,  it  is  evident  that  the  consumer  has  lost  the  ad- 
vantage of  competition  and  not  gained  those  of  monopoly. 

‘‘It  is  also  argued  that  if  land  should  be  taken  at  its  present 
value,  mains  and  services  should  likewise  be  appraised  at  the  cost  to 
reproduce;  that  the  increase  in  the  value  of  the  land  is  a social  in- 
crement; that  improvement  in  paving  is  also  a social  increment;  and 
that  if  one  is  to  be  recognized  as  belonging  to  the  company,  the  other 
should  be.  Doubtless  there  is  some  similarity,  and  so  far  as  there  is, 
there  is  equal  injustice  in  allowing  the  company  to  make  a profit  upon 
that  increase.  Indeed,  it  is  not  yet  clearly  settled  by  the  courts  that 
in  all  cases  land  shall  be  taken  at  appreciated  value  and  the  company 
allowed  to  increase  its  rates  because  of  such  growth.  But  pavement 
that  is  not  owned  nor  laid  nor  paid  for  by  the  company  is  very  un- 
like land. 

‘Tn  the  first  place,  land  is  owned  or  leased  by  the  company;  the 
pavement  in  question  is  neither  owned  nor  leased.  The  company  may 
sell  the  land  it  has  and  buy  other  land;  the  company  has  no  such  right 
over  pavement,  and  if  it  removes  its  pipes,  the  pavement  remains. 

“Secondly,  the  company  pays  for  land;  it  does  not  for  new  pave- 
ment. Land  is  a necessary  factor  in  gas  production  and  distribution; 
pavement  is  not.  It  matters  not  whether  the  streets  are  paved  with 
the  most  expensive  material  or  allowed  to  remain  in  their  natural 
state.  Repairs  may  cost  more  in  the  former  case,  but  such  expenses 
are  paid  for  out  of  income  and  not  from  capital. 

“Thirdly,  the  precise  land  used  is  selected  by  the  company;  the 
nature  of  the  pavement  is  fixed  by  the  public  authorities.  If  the  com- 
pany finds  its  land  not  well  adapted  to  its  needs  or  too  valuable  for 
gas  purposes,  it  may  sell  and  purchase  locations  elsewhere.  Thus,  a 
company  may  secure  the  increase  in  value  for  itself.  But  there  is  no 
known  way  whereby  a company  may  sell  the  pavement  over  its  mains 
and  substitute  another  kind.  Pavement  is  wholly  beyond  the  control 
of  the  company.” 


PAVING  STATISTICS. 

The  records  of  the  Commonwealth  Edison  Company’s  conduit 
construction  are  not  complete  in  detail  prior  to  January  1st,  1897. 
Between  that  date  and  the  date  of  the  appraisal,  June  1st,  1908, 
the  conduit  records  on  all  new  construction  were  checked  with 
street  paving  records  of  the  Board  of  Local  Improvements  to  as- 
certain what  proportion  of  pavement  was  actually  relaid  at  the 
expense  of  the  company.  Information  was  obtained  from  which 
the  following  percentages  were  calculated : 


35 


PERCENTAGE  O F 
ALL  CONDUIT 
AND  TUBE 

PER  CENT  OF  APPRAISED  VALUE  OF  (TRENCH 
PAVING  OVER  UNDERGROUND  SYS-  FEET)  I N- 
TEM  WHICH  COST  THE  COMPANY  STALLED  BE- 
NOTHING.  TWEEN  JANU- 
ARY 1,  1897. 

AND  JULY  1, 

1908. 


Conduit  and  Edison  tube 
laid  in  advance  of  pav- 
ing   

Changes  in  paving  be- 
tween date  of  installa- 
tion and  date  of  ap- 
praisal which  in- 
creased appraised 
value  of  paving 


Company’s  Estimate  Actual.  January  1st, 
1887  to  June  1st,  1807,  to  June  1st, 
1908.  (All  Conduit  1908.  (During  This 
and  Tube  Was  In-  Period  56.9%  — on 
stalled  During  This  Trench  Foot  Basis- 
Period.)  of  All  Conduit  and 

Tube  was  Installed.) 


Total 


14.6 


26.5 

41.1% 


45.8 


18.1 

63.9% 


30.8 


13.5 

44.3% 


In  the  case  of  the  conduit  and  Edison  tube  installed  prior  to 
January  1st,  1897,  the  paving  charges  were  much  higher  than  in- 
dicated by  the  above  figures,  as  a large  proportion  was  laid  in  dis- 
tricts where  streets  were  paved  and  the  Company’s  requirements 
in  underground  construction  were  not  anticipated  to  any  extent 
when  streets  were  repaved,  as  has  been  the  case  in  later  years. 

Assuming  that  in  conduit  construction  prior  to  1897  the  paving 
expense  to  the  company  per  trench  foot  of  all  conduit  installed  was 
not  less  than  double  the  amount  from  that  date  to  June  1st,  1908, 
the  estimate  appraised  value  of  paving  not  paid  for  by  the  company 
would  amount  to  48  per  cent  of  the  total.  The  company’ s estimate 
of  41.1  per  cent  is  accordingly  deemed  reasonable  and  that  per  cent 
of  the  total  appraised  cost,  or  $633,468.00,  is  deducted  from  the  ap- 
praised value  of  conduit.  When  correction  is  made  for  the  differ- 
ence in  overhead  charges  as  estimated  by  Byllesby  and  as  allowed 
in  this  report,  this  amount  is  reduced  to  $601,662.00. 

Since  1908  the  company  has  not  included  in  its  conduit  con- 
struction costs  any  paving  charges  not  actually  expended. 


ACCRUED  DEPRECIATION. 

Depreciation  can  be  defined  as  a decrease  in  value  occasioned 
by  wear  or  age;  change  of  conditions  rendering  the  structure  in- 
adequate for  its  particular  functions  or  changes  in  the  art  which 
render  it  obsolete  as  compared  with  more  recent  structures.  De- 
preciation due  to  wear  can  largely  be  offset  by  maintenance,  but 
that  due  to  inadequacy  and  obsolescence  cannot.  For  rate  mak- 
ing purposes,  depreciation  must  be  considered  under  two  headings ; 
first,  accrued  depreciation  used  in  determining  the  present  value  of 


the  property;  and,  second,  an  annual  allowance  from  earnings  to 
offset  future  depreciation.  While  depreciation  is  sometimes  not 
handled  under  these  two  separate  headings,  it  is  advisable  that 
it  be  so  treated,  because  these  two  classes  of  depreciation  should  be 
estimated  on  a different  basis,  as  explained  later. 

In  nearly  all  leading  rate  cases  cost  new,  less  depreciation, 
has  been  taken  as  the  plant  value,  and  in  some  states  where  com- 
missions are  established  and  rate  regulation  is  enforced,  the  laws 
specifically  provide  that  present  value  must  be  the  basis  for  rate 
making. 

Depreciation  for  determining  the  present  value  should  prop- 
erly take  into  account  only  such  wear,  inadequacy  and  obsolescence 
as  have  accrued  up  to  the  present  time,  and  should  not  regard 
what  may  be  estimated  as  the  future  depreciation  due  to  these 
causes.  Past  experience  in  the  electric  light  and  power  industry 
has  proven  that  up  to  the  present  time  inadequacy  and  obsoles- 
cence are  the  greatest  factors  in  depreciation.  The  present  case 
is  no  exception. 

With  regard  to  accrued  depreciation  for  rate  making  pur- 
poses, Whitten,  in  his  “Valuation  of  Public  Service  Corporations,” 
says : 

“There  is  another  consideration  that  leads  also  to  the  conclusion 
that  existing  depreciation  should  be  deducted  in  a valuation  for  rate 
purposes.  A public  utility  service  is  assumed  to  be  continuous.  The 
service  can  only  be  rendered  by  constructing  plants,  the  parts  of 
which  will  inevitably  deteriorate  with  age  and  use  and  have  to  be  re- 
constructed from  time  to  time.  There  must  always  be  a start  with  a 
new  plant  and  there  will  always  exist  a certain  percentage  of  deterior- 
ation in  the  old  plant.  As  the  process  is  continuous  the  investment  cost 
must  be  assumed  to  be  continuous.  At  first  thought  it  might  seem  that 
a uniform  investment  cost  could  only  be  secured  by  assuming  a uni- 
form capital  value.  This  would  indeed  secure  a uniform  charge  for  in- 
terest and  profits,  but  not  a uniform  total  investment  cost.  The  invest- 
ment cost  is  not  simply  interest  and  profits  on  the  actual  investment  in 
physical  property,  but  it  includes  all  cost  for  repairs,  renewals 
and  replacements  necessary  to  keep  such  property  in  good  working 
order.  Average  annual  expenditures  for  repairs,  renewals  and  re- 
placements are  greater  in  an  old  street  railway  system  than  in  a new 
system.  In  order  to  equalize  this  increase  in  the  investment  cost 
there  must  be  a corresponding  decrease  in  the  annual  charge  for  in- 
terest and  profits.  In  other  words,,  the  investment  must  be  reduced. 
This  is  done  with  equity  to  the  investor  by  using  the  savings  of  the 
earlier  years  due  to  smaller  expenditures  for  repairs,  renewals  and 
replacements  to  amortize  the  investment,  i.  e.,  to  return  to  the  in- 
vestors a portion  of  their  original  investment. 

“The  fact  that  rates  of  charge  are  based  on  a fair  return  on  the 
depreciated  value  of  the  old  plant  does  not  mean  that  rates  will  or 
can  be  reduced  on  account  of  this  depreciation  in  value.  It  does  not 
mean  that  the  rates  established  as  reasonable  for  a new  plant  may 
be  reduced  as  soon  as  the  plant  becomes  worn.  But  the  depreciated 
value  is  taken  because  with  the  increased  expenditures  for  repairs, 
renewals  and  replacements,  rates  of  charge  would  otherwise  have  to 
be  increased.  The  only  way  that  this  is  avoided  is  by  a reduction  in 
the  capital  value  and  consequently  in  the  charge  for  interest  and 
profits,  sufficient  to  offset  these  increased  expenditures.  In  this  way 
the  investment  cost  is  made  uniform  and  likewise  the  reasonable  rate 
of  charge.” 


37 

The  manner  in  which  accrued  depreciation  was  treated  in  the 
Company  appraisal  is  shown  on  page  28. 

For  the  purposes  of  this  report  the  factors  entering  into  the 
computation  of  the  accrued  depreciation  were  obtained  from  such 
records  as  were  available  and  from  such  personal  inspection  as  was 
possible. 

In  estimating  depreciation  Byllesby  did  not  depreciate  the 
overhead  costs  except  engineering  and  insurance  charges.  As  in 
practically  every  case  when  portions  of  the  plant  have  depreciated 
to  a point  where  they  should  be  renewed,  they  have  become  inade- 
quate or  obsolete  and  are  not  reconstructed  along  the  old  lines,  and 
overhead  charges  for  engineering,  insurance,  taxes  and  interest 
during  construction  and  contingencies  must  be  added  to  the  cost 
of  new  construction.  This  being  the  case,  when  the  property  as 
appraised  is  superseded,  the  greater  part  of  the  overhead  cost 
would  remain  on  the  books,  resulting  in  the  addition  of  fictitious 
capital  values  if  this  method  is  employed. 

Therefore,  in  this  report  all  overhead  charges  have  been  de- 
preciated in  the  same  ratio  as  the  physical  property.  This  is  also 
the  practice  of  the  Commonwealth  Edison  Company  in  “writing 
off”  superseded  property. 

INVESTMENT  IN  SUNDRY  PROPERTIES. 

The  largest  item  under  the  above  heading  which  the  Company 
presents  as  part  of  the  investment,  to  be  included  in  the  determina- 
tion of  rates,  is  investment  in  coal  properties,  amounting  to  $395,- 
172.  Since  these  properties  are  not  being  operated,  it  does  not 
seem  proper  to  include  them  in  this  valuation. 

The  discussion  of  a similar  problem  contained  in  the  opinion 
of  Commissioner  Maltbie  in  Mayhew  vs.  Kings  County  Lighting 
Company,  2 P.  S.  C.  1st  D.  (N.  Y.),  decided  October  20th,  1911, 
seems  applicable  here.  He  says: 

“Prudent  management  may  require  that  land  shall  be  purchased 
in  advance  of  actual  needs,  for  it  may  be  clearly  impossible  to  secure 
adjacent  property  just  as  it  is  needed  at  reasonable  terms.  Upon 
the  other  hand,  it  would  be  unwise  for  the  Commission  to  adopt  a 
policy  that  would  encourage  a company  to  speculate  in  land  ad 
infinitum  and  to  call  upon  the  gas  consumers  to  pay  its  losses.  Even 
if  they  were  to  share  in  the  profits,  it  would  be  unwise,  for  the  pur- 
pose of  a gas  corporation  is  not  speculation  in  land,  but  to  supply 
gas  to  consumers.  The  distribution  of  gas  is  a quasi-public  function, 
and  for  this  reason  gas  corporations  have  been  given  unusual  powers. 
Speculation  in  land  is  not  such  a function.  But  if  a company  does 
acquire  more  than  is  immediately  necessary,  and  if  such  acquisition 
is  reasonable  and  wise,  the  consumers,  who,  under  the  circumstances, 
must  carry  the  burden,  should  also  share  whatever  gains  may  accrue 
from  such  ownership.  It  is  the  opinion  of  the  Commission  that  a 
company  should  be  allowed  reasonable  latitude,  that  it  should  not  be 
penalized  for  purchasing  land  somewhat  in  advance  of  its  needs  and 
that  the  resulting  revenue  or  profit,  being  a necessary  adjunct  of  the 
distribution  of  gas  to  the  extent  that  the  property  itself  is  a part  of 
the  gas  property,  shall  be  considered  part  of  the  income  of  the  com- 
pany. 

“Applying  these  principles  to  the  iacts  in  this  case,  it  is  clear 
that  the  land  which  is  not  used  even  in  part  for  gas  purposes  should 


be  excluded  from  consideration;  it  should  not  be  included  among  the 
property  upon  which  a fair  return  is  to  be  earned,  and  the  income 
therefrom  should  not  be  treated  as  part  of  the  income  of  the  com- 
pany for  the  purposes  of  this  case.” 

Other  items  of  investment  under  this  heading  include  sundry 
securities,  cash  advances  and  miscellaneous  properties.  With  the 
exception  of  merchandising  and  advertising  investment  (which 
have  been  included  in  Unclassified  District  Installation)  considera- 
tion of  these  advances  and  properties  is  not  essential  to  the  question 
of  rates. 

INTANGIBLE  VALUES. 

The  above  caption  in  this  discussion  is  used  to  designate  all 
those  values,  real  or  doubtful,  in  addition  to  physical  plant  value 
which  are  claimed  and  disputed  in  most  cases  of  rate  revision.  Such 
items  as  contractor’s  profits,  engineering  and  supervision,  legal  and 
organization  and  similar  expenditures  are  considered  a part  of 
physical  value  and  are  treated  of  elsewhere  in  this  report. 

In  the  history  of  rate  revision  capital  allowances  have  been 
claimed  on  various  hypotheses,  among  the  apparently  most  reason- 
able being:  that  a value  for  franchise  be  included  because  of  its 
worth  to  the  owner;  that  going  value  arising  from  earning  ca- 
pacity be  given  weight;  that  cost  of  development  is  experienced 
by  all  utilities  and  consequently  must  be  considered. 

The  consideration  of  franchise  value  in  rate  cases  resolves 
itself  into  a question  of  grantor  versus  grantee.  The  munici- 
pality as  grantor  confers  upon  the  corporation  the  rights  and  privi- 
leges of  operating  and  maintaining  plants  and  in  connection  there- 
with use  of  streets  and  public  ways  as  necessary  in  furnishing 
service  to  the  public.  The  grantee  agrees  to  conform  to  the  pre- 
scribed municipal  rules  and  regulations  and  under  the  rights  re- 
served by  the  state,  and  in  some  cases  by  contract  with  the  munici- 
pality, subjects  itself  to  regulation  of  service  and  rates.  In  a 
franchise  so  granted,  where  the  public  confers  the  right  to  operate 
and  receives  in  return  only  proper  service  at  reasonable  rates,  the 
placing  of  a value  upon  such  operating  rights  is  in  effect  penalizing 
the  consumers  for  the  privileges  conferred. 

The  allowance  of  a reasonable  return  upon  the  capital  value, 
as  determined  by  appraisal  of  the  property  resulting  from  proper 
expenditure  of  capital  funds,  cannot  therefore  be  based  even  in 
part  upon  a value  which  cost  nothing  but  obeyance  of  law  and  re- 
spect of  rights,  and  which  value  arises  solely  from  the  opportunity 
of  serving  the  community.  In  the  case  of  the  Commonwealth  Ed- 
ison Company  there  is  no  evidence  in  the  Company’s  or  City’s  rec- 
ords that  a payment  was  made  for  franchise  privileges ; accordingly 
no  allowance  for  franchise  value  is  made  in  this  report. 

The  question  as  to  whether  a public  utility,  when  considered 
from  the  rate  making  standpoint,  may  have  any  value  over  and 
above  the  worth  of  its  physical  property  is  dependent  upon  the 
conditions  under  which  that  utility  developed. 

Such  conditions  may  have  been  beyond  the  control  of  either 


39 


the  people  or  the  utility  or  may  have  resulted  from  policies  later 
abandoned,  or  through  the  development  of  the  utility  and  community 
been  outgrown.  From  the  general  view  point,  if  a utility  is  a neces- 
sity to  a community,  it  must  receive  sufficient  revenue  to  pay  op- 
erating expenses  and  depreciation  charges  at  least.  In  supplying 
electricity,  under  normal  conditions,  the  unit  costs  are  not  in  direct 
proportion  to  the  volume,  but  decrease  with  increased  business. 
Consequently,  and  this  with  equity  to  the  investor  in  public  ser- 
vice corporations,  rates  can  be  lower  in  the  case  of  a utility  with  a 
large  business  than  in  the  case  of  the  same  utility  with  few  cus- 
tomers and  little  business. 

The  business  of  any  utility  in  a growing  community  will  or- 
dinarily increase  in  some  normal  ratio  to  the  increase  in  popula- 
tion. To  develop  the  business  at  more  than  this  normal  rate  of 
increase,  advertising  must  be  resorted  to  and  concessions  granted 
to  acquaint  the  prospective  customer  with  the  desirable  features 
of  the  service  or  make  his  original  investment  of  small  consequence. 
Income  may  also  be  increased  by  the  purchase  of  plants  and  busi- 
ness of  competitors. 

This  policy  of  development  requires  the  expenditure  of  sums 
of  money  and  the  conditions  under  which  such  money  was  ex- 
pended must  be  the  determining  factor  in  any  allowance  for  in- 
tangible values. 

The  rule  as  established  by  legal  precedent  seems  to  be  that 
when'  earnings  or  profits  have  been  returned  to  the  business  by 
investment  in  plant  such  expenditures  are  proper  items  for  cap- 
italization, the  theory  being  that  the  surplus  might  have  been 
used  to  pay  dividends,  and  additional  securities  sold  to  provide  for 
the  new  construction. 

See  Brymer  v.  Butler  Water  Co.,  179  Pa.  2B1,  36  Atl. 
219,  251;  Kennebec  Water  Dist  v.  City  of  Waterville,  97 
Me.  185,  54  Atl.  6,  17. 

If,  however,  capital  funds,  income  from  operation,  or  net  earn- 
ings have  been  expended  for  development,  through  methods  which 
produce  no  tangible  values,  treatment  is  not  necessarily  similar. 
This  has  been  proven,  in  divers  cases,  by  the  different  methods  of 
determination  advanced  and  the  varied  final  results.  In  arriving 
at  these  results  consideration  must  be  given  to  circumstances  at- 
tending the  contribution  of  funds : Whether  stockholders  contribut- 
ed additional  capital  or  suffered  inadequate  returns  for  the  time 
being,  with  or  without  subsequent  restitution,  or  whether  the 
amounts  were  contributed  by  consumers  in  the  form  of  excessive 
rates. 

Among  theories  advanced  as  to  procedure  in  calculating  in- 
tangible value,  is  one  which  assumes  a hypothetical  plant  built  on 
the  date  of  the  valuation  which  is  to  acquire  the  business  of  the  ex- 
isting plant  in  the  territory  served  by  it  as  rapidly  as  possible  under 
non-competitive  conditions.  The  present  worth,  or  what  an  in- 
vestor could  afford  to  pay  for  the  future  annual  excess  in  net  earn- 
ings of  the  existing  plant  until  they  had  been  reached  by  those  of  the 


40 


comparative  plant  is  taken  as  the  going  value.  In  other  words,  it  rep- 
resents the  value  of  the  plant  and  business  in  excess  of  the  value 
of  the  physical  plant  alone.  The  number  of  assumptions  necessary 
to  compute  going  value  on  this  basis  renders  it  unreliable  and  or- 
dinarily precludes  its  use  except  for  comparative  purposes. 

Another  method  of  computing  going  value  assumes  that  the 
plant  is  entitled  to  earn  a fair  return  on  the  investment  from  the 
beginning  of  operation,  and  that  any  deficiency  in  net  earnings 
should  be  capitalized  for  the  following  period  and  until  the  plant 
is  earning  a fair  value  on  its  total  investment  and  the  excess  earn- 
ings have  offset  the  deficiencies  of  former  years.  In  other  words, 
it  might  be  said  that  this  method  capitalizes  the  losses  of  operation 
and  amortizes  the  losses  when  the  earnings  are  sufficient.  The 
objection  to  this  is  that  a plant  with  little  or  no  business  may  have 
a large  going  value,  and  also  that  the  interest  on  losses  is  com- 
pounded annually.  Before  this  method  can  be  applied  with  any 
degree  of  fairness,  it  should  be  evident  that  the  records  have  been 
carefully  kept  and  can  be  substantiated,  that  the  plant  has  been 
carefully  managed  and  that  the  original  investment  was  wisely 
made  so  that  a premium  is  not  placed  on  bad  judgment  or  mis- 
management. It  should  also  be  understood  that  the  period  over 
which  this  method  of  computing  going  value  is  calculated  should 
be  limited  to  what  might  be  called  the  original  development  of  the 
utility. 

In  the  Company  appraisal,  Byllesby  has  treated  intangible 
value  under  two  heads,  namely,  good  will  of  acquired  properties 
and  the  cost  of  getting  business. 

Good  Will  of  Acquired  Properties : 

The  term  “Good  Will”  ordinarily  means  those  characteristics 
of  a concern  by  which  it  enjoys  business  and  patronage  which  might 
otherwise  go  to  its  competitors.  On  this  basis,  then,  a monopoly 
can  have  no  good  will,  but  its  expenditures  for  the  acquisition  of 
the  plant  and  business  of  its  competitors  may  be  legitimate  cap- 
ital charges  if  made  in  good  faith  and  if  the  public  is  ultimately 
benefited  thereby.  This  raises  the  question  of  competition  vs. 
monopoly  in  the  electric  lighting  field. 

In  the  earlier  history  of  public  utilities,  competition  was  the 
principal  means  employed  to  insure  the  public  against  exhorbitant 
rates.  Rates  were  established  which  allowed  a fair  return  to  the 
investor  for  the  time  being,  but  did  not  permit  of  sufficient  re- 
serve for  depreciation  and  increased  maintenance  charges  as  the 
plants  approached  the  end  of  their  useful  life.  Depreciation  was 
not  in  general  understood  by  public  utility  operators,  while  it  was 
a very  important  item  in  the  case  of  electric  lighting  plants  on 
account  of  the  extremely  rapid  progress  in  the  art.  As  a result 
the  small  competing  plants,  in  many  cases,  could  not  exist  and 
give  satisfactory  service  for  any  considerable  period  without  in- 
creasing their  rates,  and  therefore,  they  were  either  forced  to 
consolidate  with  larger  and  more  recent  companies  or  to  make  an 


41 


agreement  between  them  to  increase  the  rates.  Thus  it  often  hap- 
pened that  the  method  employed  to  prevent  unreasonable  cost  of  ser- 
vice became  a means  by  which  such  conditions  were  brought  about. 

After  consolidations  took  place,  in  many  cases  the  rates  were 
raised  and  maintained  until  competition  again  became  a factor. 
It  therefore  became  recognized  among  students  of  the  problem  that 
competition  did  not  necessarily  mean  in  the  long  run  the  lowest 
rates  to  the  consumers.  The  advocacy  of  competition  ignores  the 
fact  that  public  utilities  are  natural  monopolies,  which  under 
proper  regulation  are  capable  of  rendering  superior  service  and 
ultimately  are  able  to  exist  under  a lower  schedule  of  rates  than  is 
possible  under  competition. 

With  further  regard  to  this  phase  of  the  question  bearing  on 
the  Commonwealth  Edison  Company’s  property,  the  following  is 
quoted  from  the  Company  appraisal : 

“All  electric  lighting  companies,  particularly  in  the  past,  have 
suffered  from  competition  of  generally  ill-considered  and  recklessly 
managed  plants  which  have  invaded  their  territory.  Such  competi- 
tion has  uniformly  resulted  in  a greater  or  less  demoralization  of 
rates.  This  has  been  particularly  the  case  where  one  company  has 
been  much  larger  than  its  competitor  or  competitors  and  where  the 
larger  company  has  fulfilled  its  natural  function  of  supplying  elec- 
tricity at  substantially  uniform  rates  to  all  consumers  which  its  lines 
reached  regardless  of  their  location. 

“A  large  company  of  this  description  serving  generally  the 
whole  territory  which  it  occupied,  as  has  been  the  case  with  the 
Commonwealth  Edison  Company  and  its  predecessor  organizations, 
frequently  suffered  from  the  location  under  special  franchise  pro- 
visions of  plants  in  the  center  of  some  part  of  its  best  paying  ter- 
ritory. The  small  plants  from  the  nature  of  the  rights  under  which 
they  operated  were  frequently  not  compelled  to  go  outside  of  the 
very  remunerative  territory  which  they  occupied,  and  also  had  no 
obligations  resting  upon  them  for  the  increasing  of  their  plants.  Con- 
sequently, in  order  to  obtain  the  business  from  the  larger  companies, 
rates  were  made  which  were  believed  to  be  remunerative  to  the 
smaller  companies  occupying  a limited  field,  but  which  if  forced 
upon  the  larger  company  would  prove  most  burdensome,  if  not 
ruinous. 

"Inferiority  of  service  is  bound  to  be  the  outcome  of  such  com- 
petition, and  it  is  today  generally  conceded  that  a public  electric  light- 
ing company  must  have  a monopoly  of  the  field. 

“Furthermore,  competing  franchises  have  been  given  by  munici- 
palities to  many  different  people  and  companies  in  the  past  for  sup- 
plying the  same  area,  so  that  the  burden  that  many  large  companies 
have  suffered  can  be  directly  ascribed  to  the  municipalities  them- 
serves. 

“The  natural  tendency  of  any  competition  is  to  spread  with 
the  attendant  lowering  of  rates,  because  one  customer  feels,  and 
naturally,  that  he  should  receive  as  good  a rate  as  his  neighbor  for 
the  same  character  of  service.  The  only  course  for  the  company 
covering  the  whole  field  is  to  purchase  and  this  at  figures  usually  be- 
yond the  physical  value  of  the  properties  so  acquired.  The  plants 
purchased  have  usually  had  to  be  scrapped  or  sold  on  the  second-hand 
market.  The  systems  of  distribution  are  usually  unadapted  to  the 
systems  of  the  purchaser  and  they,  too,  have  to  be  disposed  of  in  the 
same  manner,  so  that  the  price  paid,  as  a rule,  for  competing  com- 
panies is  largely  for  ‘good  will  and  the  business’.” 

The  purchase  price  of  the  various  competing  companies  ac- 


quired  at  different  times  by  the  Chicago  Edison  Company  and  the 
Commonwealth  Electric  Company,  as  shown  by  the  appraisal,  which 
was  the  only  source  of  information,  was  $5,801,424,  to  which  10 
per  cent  was  added  for  incidental  expenses,  making  a total  of 
$6,381,566.  The  appraised  value  of  the  physical  property  useful 
to  the  purchasers  was  only  $2,660,305;  the  balance,  or  $3,721,261, 
therefore,  being  excess,  representing  cost  of  the  acquired  business 
to  the  purchaser. 

While  the  amount  of  $3,721,261  represented  excess  cost  to  the 
Commonwealth  Edison  and  its  predecessor  companies,  it  undoubt- 
edly represented  to  the  small  vendor  companies  some  tangible  prop- 
erty which  had  been  necessary  and  useful  in  supplying  service.  The 
different  types  of  investment  and  the  different  methods  of  distribu- 
tion used  by  the  purchaser  rendered  such  property  unnecessary  and 
valuless  for  operating  purposes. 

The  methods  used  by  the  appraiser  in  determining  the  value 
of  purchased  properties  follow : 

“The  Commonwealth  Edison  Company  has  kept  a careful  record 
of  the  property,  business  and  other  circumstances  of  the  companies 
it  has  acquired. 

“We  have  familiarized  ourselves  with  the  history  of  such  com- 
petition, and  have  examined  maps  and  records  and  inventories  and 
original  papers  of  negotiations  upon  them;  we  have  informed  our- 
selves upon  the  condition  and  disposal  of  the  physical  property  of 
such  companies,  and  how  the  systems  were  merged  after  the  pur- 
chase. In  this  way  we  have  formed  a basis  for  valuation  of  the 
worth  of  the  physical  property.  The  difference  between  this  figure 
and  the  price  paid  represents  the  good  will  and  the  business.  In 
treating  the  useful  physical  property  of  such  companies,  we  have 
been  as  liberal  as  possible  in  considering  what  its  cost  value  was.  We 
have  not  only  added  an  adequate  contingency  and  engineering  per- 
centage, but  have  added  a percentage  for  piece-meal  construction, 
which  is  very  large  (in  percentage  figures)  in  small  companies,  and 
have  added  a percentage  for  the  organization,  legal  expenses  and 
brokerage  incident  to  making  such  properties  productive.  From  the 
physical  value,  plus  engineering,  contingency  and  piece-meal  con- 
struction percentages,  we  have  deducted  an  amount  for  depreciation, 
arrived  at  from  a study  of  the  history  of  the  situation  and  other  in- 
formation afforded.  The  depreciation  amount  has  purposely  been 
kept  low  so  as  to  be  conservative. 

“To  the  total  purchase  price  paid  in  cash,  or  its  cash  equivalent, 
has  been  added  a brokerage  figure  of  5%  to  cover  the  cost  of  obtain- 
ing money.” 

SUMMARY  OF  PROPERTIES  PURCHASED 


Purchased  by.  Purchase  Price. 

Chicago  Edison  Company $3,176,424.00 

Commonwealth  Electric  Co....  2,625,000.00 


Value  to 
Company 
of  Physical 
Property. 
$1,509,560.00 
1,150,745.00 


Good  Will 
and 

Business. 

$1,666,864.00 

1,474,255.00 


$5,801,424.00  $2,660,305.00 

Add  for  brokerage  and  legal, 
auditing,  organization,  in- 
cidental and  engineering 

investigations,  10%  580,142.00  


$3,141,119.00 


580,142.00 


$6,381,566.00  $2,660,305.00  $3,721,261.00 


43 


In  the  detailed  statement  of  price  paid  for  acquired  properties 
are  items  amounting  to  $197,080.00,  for  which  the  purchaser  re- 
ceived no  tangible  property  whatever,  or,  in  other  words,  the  price 
paid  was  for  franchise  only.  In  all  other  cases,  while  the  price 
paid  was  in  excess  of  the  value  of  the  physical  property  to  the 
buyer,  the  purchase  brought  with  it  some  connected  load  and  es- 
tablished income.  Evidently,  the  public  should  not  be  forced  to  pay 
in  electric  rates  a return  on  capitalized  franchise  value,  which,  as 
previously  stated,  it  granted  without  cost  to  the  grantee.  This 
amount  of  $197,080.00,  accordingly  is  deducted  from  the  total  price 
paid  for  acquired  properties. 

To  the  price  paid  for  the  acquisition  of  these  competing  prop- 
erties, 5 per  cent  was  added  for  the  estimated  expenditure  for  legal, 
investigation  and  incidental  expenses,  and  5 per  cent  for  the  cost 
of  obtaining  the  money  or  brokerage.  While  those  estimates  ap- 
pear reasonable  in  amount,  the  item  for  brokerage  should  not  prop- 
erly appear  in  capital,  as  has  been  explained  previously,  and  there- 
fore has  been  eliminated  here.  Deducting  this  item  amounting  to 
$280,217  and  the  $197,080  above  mentioned,  the  net  figure  for  the 
cost  of  acquired  properties  as  of  June  1st,  1908,  is  $3,224,256. 

This  amount  has  been  included  in  capital  value  because  it 
represents,  so  far  as  can  be  ascertained,  capital  spent  in  good  faith 
for  property  and  business,  the  acquirement  of  which  has  been  of 
undoubted  benefit  to  the  present  day  user  of  electricity. 

Cost  of  Getting  Business : 

The  following  is  taken  from  the  company  appraisal  under  the 
above  headings: 

COST  OF  OBTAINING  NEW  BUSINESS  UPON  THE  SYSTEM  OF  THE  COMPANY. 

“In  maintaining  an  undisputed  field,  which  is  a recognized  es- 
sential in  public  electric  lighting  enterprises,  extensions  have  to  be 
made  into  territory  that  is  oftentimes  sparsely  settled  and  to  con- 
tinue in  territory  where  competition  has  sprung  up,  and  efforts  must 
be  put  forth  to  create  business  upon  such  lines  as  an  offset  to  interest 
obligations,  maintenance  and  operating  expenses,  and  even  deprecia- 
tion, which  otherwise  would  accumulate  before  the  lines  become  fully 
productive.  Furthermore,  a company  following  good  engineering 
practice  must  attempt  to  construct  for  the  future,  even  in  good  ter- 
ritory and  efforts  must  be  made  to  produce  business  upon  such  lines 
to  make  the  outlay  remunerative,  in  other  words,  the  cost  of  pro- 
ducing business  is  to  an  extent  an  offset  to  interest  burdens  and 
even  depreciation.  It  is  essentially  so  in  communities  in  which  com- 
panies are  not  protected  in  their  franchises  and  where  many  other 
well  known  influences  force  the  company  to  cover  all  the  territory. 

“Large  outlays  are  accordingly  made  and  must  be  made  in  ad- 
vertising, soliciting  and  in  free  wiring  concessions,  and  often  times 
in  other  special  concessions.  This  expense  is  only  a contributing  in- 
fluence with  efficiency  of  service  and  reasonable  rates  in  producing 
volume  of  business,  which  ultimately  reflects  in  permanently  lower 
rates  to  the  public,  which  can  only  come  with  volume  of  business 
and  a free  field,  and  this  outlay  is  apart  and  independent  of  the  in- 
fluences of  rates  and  general  efficiency  and  reliability  of  service.  The 
outlays  in  territory  where  competition  is  sharp  are  always  large. 

“In  addition  to  the  foregoing  statements,  the  money  spent  for 
‘New  Business  Account’,  and  which  covers  only  the  outlays  in  ad- 


44 


vertising,  canvassing,  demonstrations  and  free  wiring  for  the  ob- 
taining of  new  business,  comprises  an  expenditure  which  produces 
for  the  company  a permanent  source  of  income  and  must  not  be 
likened  to  the  Celling  expense  of  a trading  concern  where  there  is  a 
selling  expense  for  each  transaction. 

“When  commissions  or  municipalities  protect  companies  these 
outlays  will  not  be  as  large  as  in  the  past,  but  even  then  they  must 
to  som<*  extent  be  necessary  as  an  offset  to  interest  and  depreciation 
charges,  arising  out  of  construction  for  the  future,  and  if  commis- 
sions rule  that  such  outlays  must  be  charged  to  operating  account, 
they  must  sanction  rates  which  will  cover  such  expenses,  otherwise 
companies  must  sink  to  the  level  of  the  municipality  operated  un- 
dertakings, of  which  we  have  knowledge. 

“In  the  foregoing  view  of  the  case  we  believe  this  to  be  a legiti- 
mate item  in  the  valuation  of  this  company,  forming  a portion  only 
of  the  intangible  valuation  of  the  general  public  good  will. 

“You  have  given  us  the  outlays  which  your  company  has  made 
in  the  past  in  producing  your  connected  load,  and  in  comparisor, 
with  outlays  of  a similar  nature  in  other  large  companies  we  find 
them  to  be  reasonable. 

“Your  statistical  department  has  given  us  the  following  data  foi 
your  connected  load  (exclusive  of  railway  load),  as  of  June  1st,  1901s; 


Number  of  customers 72,096 

Incandescent  16  C.  P.  equivalents 2,107,813 

Arcs,  1,200  C.  P 3,283 

Arcs,  2,000  G.  P 14,093 

H.  P.  of  general  motors 72,980 

H.  P.  of  elevator  motors 32,533 

Battery  charging  o'f  private  consumers  (kilo- 
watts)   5,545 


Total  16  G.  P.  equivalent 3,965,174 

The  outlay  in  producing  this  business  as  reported  by  your  com- 
pany has  been  as  follows : 

Advertising  $ 649,900.00  § 

Soliciting  944,500.00  § 

(*)Free  wiring  575,700.00  § 


Total  cost  $2,169,700.00  § 


(*) Wiring  of  signs  is  included  in  the  valuation  of  signs  under 
“Physical  Valuation.” 

§*  Figures  are  taken  from  Vol.  1 of  Byllesby  Appraisal.” 

As  far  as  can  be  ascertained,  all  expenditures  in  connection 
with  the  cost  of  getting  business  have  in  the  past  been  defrayed 
from  revenue  and  charged  to  operating  expenses  in  the  cases  of 
the  Commonwealth  Electric  and  Chicago  Edison  Companies,  as 
well  as  in  the  case  of  their  successor,  the  Commonwealth  Edison 
Company,  and  were  not  capitalized  until  the  appraisal  was  adopted 
as  a basis  for  capitalization  of  the  consolidated  Company. 

In  other  words,  these  amounts  spent  for  developing  the  busi- 
ness in  the  form  of  advertising  and  soliciting  were  charged  to 
operating  expenses  and  were  consequently  borne  by  the  consumers 
during  those  years  unless  deficits  resulted  which  placed  the  burden 
on  the  stockholders  by  impairing  their  return  on  investment. 

Inasmuch  as  substantiated  records  of  the  company  prior  to 
1908  are  not  available,  reliable  computations  cannot  be  made  under 
any  of  the  methods  where  capitalization  of  deficits  until  amortized 


45 


by  profits,  is  the  basis,  but  the  records  of  the  company  today  in- 
dicate that  if  such  losses  were  suffered  they  have  been  requited. 
It  is  reasoned  that  inasmuch  as  the  Chicago  Edison  Company  has 
paid  dividends  since  1889  to  the  date  of  consolidation  at  the  rate  of  8 
per  cent  per  annum,  that  the  Commonwealth  Electric  Company  was 
operated  in  the  interests  of  the  Chicago  Edison  stockholders  who 
have  since  received  stock  value  for  that  interest;  that  since  the 
date  of  consolidation  dividends  have  been  paid  at  rates  increasing 
from  5 per  cent  to  7 per  cent  annually,  and  that  in  addition  to  these 
returns  the  Company  during  recent  years  has  written  down  plant 
value  directly  from  earnings  and  has  further  accumulated  a com- 
bined surplus  and  depreciation  reserve  amounting  December  31, 
1911,  to  $7,764,540.00,  which  is  in  excess  of  our  estimated  accrued 
depreciation,  therefore  a claim  for  going  value  on  the  basis  of 
accumulated  deficits  would  be  unwarranted.  No  allowance  has  ac- 
cordingly been  included  in  capital  value  for  advertising  and  solicit- 
ing, because,  in  brief,  this  expense  has  been  borne  by  consumers, 
with  no  loss  to  the  Company,  and  it  would  be  grossly  unfair  to 
now  capitalize  such  contributions  from  which  the  Company,  as 
well  as  its  patrons  benefited,  and  thereby  penalize  consumers  a 
second  time,  as  would  in  effect  be  done  if  they  were  required  to 
pay  an  interest  return  on  such  a capital  allowance. 

Included  in  the  cost  of  getting  business  is  an  item  repre- 
senting free  wiring  amounting  to  $575,700.00.  Free  wiring  prior 
to  the  company  appraisal  consisted  mostly  of  price  concessions 
on  wiring  of  premises  for  prospective  customers.  In  character  of 
expenditure  these  concessions  are  similar  to  expenses  incurred  in 
cutting  through  paving  which  create  no  property  value  for  the 
Company  but  are  necessary  in  order  to  supply  service.  Because  of 
the  tangible  character  of  the  investment  and  in  accordance  with 
the  principles  previously  discussed  and  cases  cited,  the  item  of 
$575,700.00  for  free  wiring  is  included  in  capital.  The  so-called 
free  wiring  done  at  present  represents  cost  of  wiring  signs,  Tung- 
sten fixtures,  posts,  etc.,  and  the  value  thereof  is  returned  in  the 
service  charge. 

Below  is  a summary  of  the  excess  cost  of  acquired  properties 
and  allowance  for  free  wiring  included  in  this  report  for  valuation 
purposes.  A deduction  made  by  the  Company  in  its  annual  writing 
off  is  included  therein,  for  the  reason  that  the  Company  has  cap- 
italized the  previously  discussed  expenditures  met  out  of  past 
earnings,  and  the  cost  of  eliminating  competition,  and  has  received 
a return  thereon,  in  addition  to  which  it  was  able  to  accumulate 
this  credit  of  $552,277.00.  It  is  believed  equitable  that  the  con- 
sumer should  receive  the  benefits  of  such  excess. 

The  amount  $3,274,679.00  composes  the  total  tangible  value 
as  of  June  30,  1911. 


46 


SUMMARY  OF  EXCESS  COST  OF  ACQUIRED  PROPERTIES  AND  FREE  WIRING 
INCLUDED  IN  VALUATION. 

Excess  cost  as  shown  on  page  42.  . . $3,721,261 

Less  price  paid  for  franchise  only, 

plus  10%  $216,788 

Less  brokerage  280,217 

Total  exclusions  $497,005  497,005 

$3,224,256 
575,700 


Total  as  of  Sept.  17th,  1907 $3,799,956 

Written  off  by  company 552,277 

Balance  as  of  June  30,  1911 $3,247,679. 

WORKING  CAPITAL. 

In  determining  the  amount  to  be  added  to  investment  to  repre- 
sent working  capital,  the  proper  unit  has  been  considered  the  amount 
of  money  necessary  to  run  the  Company  until  such  time  as  the  re- 
turn from  sales  of  current  and  merchandise  will  defray  the  ex- 
pense plus  the  profit  from  operation.  This  figure  has  been  added 
to  the  amount  held  in  stores  and  coal  reserve,  and  together  with  a 
minimum  cash  balance  makes  the  total  allowance  for  working  cap- 
ital. 

The  factors  entering  into  the  computation  of  time  are  length 
of  reading  period,  time  necessary  for  billing  and  time  allowed  for 
payment.  If  it  takes  the  full  time  of  each  of  these  factors,  the  meas- 
ure of  total  expense  is  the  ratio  that  the  total  of  days  in  all  fac- 
tors bears  to  the  full  year.  If  meter  reading,  billing  periods  and  pay 
periods  for  a class  of  service  are  made  from  day  to  day,  i.  e.,  distrib- 
uted throughout  the  month,  the  expense  necessary  to  furnish  that 
class  of  service  is  not  accumulated  from  the  day  of  commencing  ser- 
vice to  time  of  payment,  but  is  continuously  returned,  so  that  ap- 
proximately only  one-half  of  the  total  expenditure  is  involved  at 
any  time.  Because  of  the  fact  that  all  bills  are  not  of  the  same 
amount,  but  will  vary  from  month  to  month,  a factor  of  60  per  cent 
of  the  total  time  has  been  used  for  those  classes  of  service  in  which 
readings  are  distributed. 

The  various  periods  for  each  class  of  service  have  been  fur- 
nished by  the  Company,  the  ratio  of  that  period  to  the  year  deter- 
mined, and  the  percentage  applied  to  the  year’s  revenue  of  that 
class  of  service.  The  ratio  of  operating  expense  to  income  from 
operation  has  then  been  applied  to  give  the  amount  of  expense  in- 
curred in  producing  the  recorded  amount  of  revenue. 

The  Company’s  coal  supply  would  vary  from  year  to  year,  de- 
pending on  local  conditions,  such  as  strikes  and  famines,  but  it  was 
considered  that  a supply  sufficient  to  operate  the  Company  for  an 
average  three  months’  period  would  be  an  ample  allowance. 

The  remaining  items  in  the  accompanying  schedule  are  self- 
explanatory,  the  sum  total  of  $2,535,690,  which  amounts  to  16.39 


Balance  . . . 
Free  wiring 


47 


per  cent  of  the  gross  revenue  (including  merchandise  sales) , pro- 
viding a total  allowance  deemed  fair  for  average  conditions. 

While  it  may  be  maintained  that  a minimum  cash  balance  of 
$500,000  is  not  sufficient  protection  to  the  operators  of  a Company 
of  this  size,  it  is  well  to  remember  in  comparing  this  item  with 
published  balance  sheets  that  the  amount  of  cash  is  being  contin- 
uously augmented  by  profits  from  operation  which  are  only  period- 
ically disbursed  in  dividends  and  interest,  and  then  only  in  part. 

The  above  method  of  computing  working  capital  is  believed  to 
be  fairly  indicative  of  the  necessary  amount  to  operate  this  Com- 
pany. The  ordinary  method  of  considering  excess  of  current  as- 
sets over  current  liabilities  may  include  periodic  increases  in  cash 
as  dividend  and  interest  payment  dates  approach,  or  cash  awaiting 
investment  in  plant  extensions  or  bills  or  accounts  receivable  aris- 
ing from  business  affiliations  foreign  to  the  business  under  regula- 
tion, any  one  of  which  would  destroy  the  value  of  such  a computa- 
tion as  an  index. 

It  is  not  considered  necessary  to  allow  an  amount  for  defray- 
ing the  expense  of  plant  extensions  because  in  the  physical  valua- 
tion, interest  carrying  charges  have  been  allowed  both  on  the  orig- 
inal plant  and  additions  since.  Materials  for  repairs  are  carried 
in  stores. 


WORKING  CAPITAL. 


48 


Oorres  ponding 
Amount  of  To- 
tal Revenue  


Percentage  Aver- 
age Period  is  of 
365  Days  

60%  of  (Dist.)  To- 
tal Days,  100% 
of  (Co-in.)  To- 
tal Days  

Readings  Co-inci- 
dent or  Distrib- 
uted Through 
the  Month 

Readings  


fPay  Period... 

Billing  Period 

Reading  Pe>- 
riod  


ji  Percentage 
i Gross  . . 


of 


1911  Revenue 


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WORKING  CAPITAL 


SUMMARY  OF  INVESTMENT. 


49 


II 

| Final  Value,  Cost 
| Less  Depreciation 
I as  of  6-30-11  on 
||  Revised  Basis 


i m isss  si  Him 
§ mi  B3  i® 

OS  'dT  • 10  ©q  CO  co 


j Accrued  Deprecia- 
j tion  to  6-30-1911. 


SSB  :8SS  II  Sllli 
gSS  ;ss|  »g  !3S«s 


Original  Cost  as 
of  6-30-1911  on 
Revised  Basis 


i‘ 

If  Additional  Deduc- 
II  tions  on  Account 
1 1 of  Unused  Prop- 
| exty  and  Equip- 
ment  


i iii  ills  §8  iii'is 
s mi  m i|  iiiis 


Removals  on  Ba- 
sis of  Revised 
Original  Cost... 


3 IlllSiS  II  ISliS 

SgSSggg  sss  §j§83S§ 


Additions  from  9- 
7-07  to  6-30-11 
with  3%  Added 
for  'Carrying 
Charges  on  Real 
Estate  and  Con- 
struction   


I 


SSI 

-‘a'i 


li  Sills 
II  |il/” 

r-T  rH 


! Revised  Original 
Cost  as  of  Sept. 
17,  1907 

Byllesby  Original 
|l  Cost  


2 11 

III!  Sslii 

g 11 

oT  CO  00 

nm  si  8s§§§ 

oT  oq  01  oi 

1 i| 

§1  11888 

1 is 

®i§§  gs  iiiii 

I! 

Jj  Byhesby  Accrued 
Depreciation 


: S : 

iliii  : 

: iligi 

§ 

i 1 i 

: 

03  r—t  03 

; ISS« 

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g 

: r_l 

a 

Byllesby  Figure* 
Adjusted  to  9-17- 
07  as  on  Books 
of  Company  


^ 53  -aS^3®-g-S; 

sSSlSeSS 


kO 


50 


The  final  valuation  new  and  the  present  value  of  the  used  and 
useful  property  of  the  company  as  obtained  by  modification  of  the 
appraisal  together  with  the  net  additions  and  adjustments  as  ex- 
plained in  the  foregoing  pages  and  shown  in  table  7,  is  summarized 
as  follows : 


Physical  valuation,  new $57,680,056 

Less  accrued  depreciation 5,479,867=9.50% 


Present  value  of  physical  property $52,200,189 

Excess  cost  of  acquired  properties  and  free 

wiring  3,247,679 

Working  capital  2,535,690 


Total  valuation  as  of  June  30,  1911 $57,983,558 


REVENUE. 

Adjustments  were  made  in  arriving  at  the  total  1911  revenue 
for  contracts  at  present  active  or  pending  with  street  railways  and 
bulk  supply  customers,  the  effect  of  which  is  retroactive;  for  con- 
tracts with  charitable  institutions  allowing  rebates  deducted  from 
Income  Account  which  are  not  allowed  to  other  consumers  of  the 
same  power  or  lighting  classes ; and  for  minor  bookkeeping  charges. 

The  entire  adjustment  increased  the  total  revenue  from  opera- 
tion for  the  year  1911  from  $13,902,266  to  $14,038,115.  The  reve- 
nue is  classified  and  analyzed  in  the  following  summaries  for  1911 
and  1912.  See  tables  8 and  9. 

The  1912  figures  were  adjusted  on  account  of  retroactive  rail- 
way contracts. 

Diagrams  Nos.  7,  8 and  9 show  operating  income  and  revenue 
per  k.  h.  w.  and  per  16  c.  p.  equivalent  of  connected  load  for  light- 
ing, power,  railway  and  total  business  for  a period  of  fifteen  years. 


51 


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53 


DIAGRAM  NO.  7. — INCREASE  IN  INCOME  FROM  VARIOUS  CLASSES 

OF  BUSINESS. 


54 


55 


DIAGRAM  NO.  9. — DECREASE  IN  INCOME  PER  KILOWATT  HOUR  SOLD. 


EXPENSES  FOR  THE  YEAR  1911. 


The  Company’s  figures  as  on  the  books  showed  a total  charge 
for  shrinkage,  storage  and  adjustment  of  coal  prices  of  $235,- 
160.57.  Owing  to  the  fact  that  no  survey  of  the  coal  pile  had  been 
made  for  a longer  period  than  one  year,  part  of  this  loss  was  clearly 
chargeable  to  the  expense  of  prior  years.  In  adjustment  of  these 
figures  an  average  loss  per  ton  for  the  five-year  period  preceding 
was  used  in  determining  the  allowance  for  the  year  1911  of 
$137,052,  which  is  believed  to  be  a fair  amount. 

The  Commonwealth  Edison  Company  in  the  conduct  of  its 
business  contracted  with  certain  mines  in  the  southern  part 
of  the  state  for  a fixed  percentage  of  the  annual  output  of  these 
mines.  This  contract  was  made  in  order  to  protect  the  Company 
in  the  event  of  coal  famines  as  well  as  a further  protection  against 
high  prices  in  case  the  coal  market  became  overbought,  which 
would  place  the  Company  under  considerable  expense  to  supply  its 
regular  demands.  Provisions  of  this  contract  make  the  Company 
responsible  for  50  per  cent  of  the  losses  sustained  by  the  mines  in 
carrying  out  the  coal  supply  agreements.  This  loss  during  the  year 
1911  amounted  to  $53,164.  While  the  amount  of  loss  has  been 
included  in  the  1911  expense,  it  is  questionable  whether  the  Com- 
pany will  in  future  be  benefited  to  the  extent  of  this  amount,  inas- 
much as  the  Company  is  now  protected  under  active  and  pending 
contracts  to  the  extent  of  coal  necessary  to  produce  about  two- 
thirds  of  its  output  in  case  of  increase  of  coal  prices. 


PURCHASED  POWER. 


While  not  a necessity  for  the  Commonwealth  Edison  Company 
to  purchase  power  on  account  of  insufficient  plant  capacity,  it  is 
deemed  advisable  by  them  to  do  so  in  certain  instances,  especially 
in  cases  where  the  continuity  of  service  is  thereby  insured.  Statis- 
tics of  purchased  power  for  the  year  1911  are  as  follows : 


Cosmopolitan  Electric  Co 

Public  Service  Company  of  Northern 
Illinois  (Blue  Island  Plant)... 
Mandel  Brothers  


K.  W.  H. 

Maximum 

K.  W. 

31,315,648 

7,054 

376,445 

1,750 

306,100 

270 

Sixty  cycle,  three  phase,  12,000  volt  energy  is  purchased  from 
the  Cosmopolitan  Electric  Company  on  the  basis  of  $1.25  per  Kilo- 
watt of  monthly  maximum  demand  plus  .5c  per  K.  W.  H.  supplied. 

The  maximum  demand  as  established  during  any  month  be- 
comes a basis  of  the  demand  charge  for  the  following  month  until 
a higher  maximum  is  reached.  The  Commonwealth  Edison  Com- 
pany owns  and  maintains  the  transmission  lines  between  its  Quarry 
street  plant  and  the  Cosmopolitan  Electric  Company’s  plant. 

On  account  of  the  smaller  size  of  the  latter  plant  (14,000 
Kilowatts)  the  investment  per  Kilowatt  is  somewhat  higher  than  in 
the  case  of  the  Edison  Company’s  plant.  The  primary  charge  paid 
by  the  Edison  Company  is  practically  that  at  which  it  furnished 


energy  during  1911  to  its  railway  and  bulk  supply  customers,  in- 
cluding maintenance  of  transmission  lines.  The  secondary  charge 
paid  by  the  Edison  Company  is  .lc  greater  per  K.  W.  H.  than  its 
receipts  from  most  railway  and  bulk  supply  business.  While  the 
generating  cost  in  the  smaller  plant  of  the  Cosmopolitan  Company 
is  somewhat  higher  than  in  the  case  of  the  larger  plant,  the  differ- 
ence would  not  be  25  per  cent.  The  capacity  of  the  Edison  60 
cycle  generating  system  is  not  sufficient  to  take  care  of  its  peak 
load,  but  there  is  ample  additional  capacity  in  the  frequency  changer 
sets  located  in  various  sub-stations,  which  can  be  operated  from 
the  25  cycle  system  in  connection  with  the  60  cycle  generators  to 
take  care  of  the  peak  load  without  purchasing  current  from  out- 
side sources.  This  method  of  operation  would  not  increase  the 
secondary  cost  of  60  cycle  supply  to  the  figure  at  which  current  is 
now  being  purchased.  Thus  the  purchase  of  60  cycle  energy  is  not 
a necessity,  but  there  are  doubtless  some  advantages  in  having  an 
additional  source  of  supply  to  insure  continuity  of  service.  How- 
ever, in  view  of  the  generating  costs  in  its  own  plant  and  the  rate 
at  which  power  is  sold  to  bulk  supply  customers,  .5c  is  considered 
an  exorbitant  price  for  the  secondary  charge,  and  for  the  purpose 
of  this  report  has  been  reduced  to  .4c. 

Twenty-five  .cycle,  three  phase  energy  is  purchased  at  20,000 
volts  from  the  Blue  Island  plant  of  the  Public  Service  Company  of 
Northern  Illinois  on  practically  the  same  terms  as  from  the  Cosmo- 
politan Electric  Company  over  a transmission  line  to  the  Roseland 
sub-station,  from  where  it  can  be  transmitted  to  Grand  Crossing 
and  South  Chicago  sub-stations  by  tie  lines.  On  account  of  the  fact 
that  these  sub-stations  are  operated  from  the  Edison  Company’s 
plant  over  long  lines  of  20,000  volt  cables  it  is  deemed  advisable  to 
have  this  additional  source  of  supply  to  insure  a greater  continuity 
of  service,  especially  as  these  sub-stations  also  contain  rotary  con- 
verter units  for  railway  supply. 

A small  amount  of  230  volt  direct  current  is  purchased  from 
an  isolated  plant  located  in  Mandel  Brothers’  retail  store  at  Madi- 
son street  and  Wabash  avenue.  While  the  Edison  system  is  not 
lacking  in  capacity  at  this  location,  this  energy  is  not  purchased  on 
unfavorable  terms  when  it  is  considered  that  the  supply  is  fur- 
nished only  during  the  winter  months  when  the  heaviest  demands 
are  made  on  the  system.  The  reduction  of  secondary  charge  to  .4c 
per  K.  W.  H.  for  current  purchased  from  the  Cosmopolitan  Elec- 
tric and  Public  Service  Company  of  Northern  Illinois  would  mean 
a saving  of  $31,752  for  the  year  1911  and  $39,265  for  the  year 
1912. 

OTHER  EXPENSE. 

In  considering  expense  from  the  rate  making  standpoint,  we 
believe  that  in  some  instances  accounting  which  may  be  conserva- 
tive from  the  Company’s  standpoint  is  not  necessarily  conservative 
from  the  consumer’s.  This  applies  to  purchase  of  materials  or  in- 
stallation of  minor  parts  of  plant  necessary  in  furnishing  service 
which  have  a longer  life  than  one  year  and  which  are  not  con- 


sumed  in  furnishing  such  service  within  the  year.  In  other  words, 
the  charging  of  the  entire  amount  of  these  expenditures  to  the 
expense  of  any  one  year  would  mean  that  the  consumers  during  that 
year  would  pay  part  of  the  expense  of  furnishing  service  in  ensu- 
ing years,  and  if  that  year’s  expense  were  used  in  determining 
future  rates,  such  rates  would  be  excessive. 

This  condition  applies  to  the  installation  of  incandescent 
lamps,  Tungsten  fixtures  and  posts,  which  under  the  present  prac- 
tice are  charged  to  operating  expense  together  with  their  renew- 
als. Inasmuch  as  abnormal  operating  expenses  may  result  under 
this  method  because  of  a large  increase  in  connected  load  during 
the  year,  capital  account  under  the  heading  of  Unclassified  District 
Installations  has  been  increased  by  the  amount  of  such  installation 
since  Sept.  17,  1907,  and  operating  expenses  for  the  year  1911  de- 
creased by  the  amount  charged  during  the  year.  An  allowance  has 
been  made  to  provide  for  depreciation  of  capitalized  items  except 
where  such  depreciation  is  met  by  renewals  charged  directly  to 
operating  expense. 

In  examination  of  revenue  accounts  it  was  observed  that  an 
item  was  deducted  from  light  income  as  representing  advertising 
privileges  received.  In  arriving  at  our  advertising  expense  this 
item  was  charged  and  the  amount  restored  to  revenue. 

Under  the  heading  of  Advertising  certain  donations  made  dur- 
ing the  year  were  charged.  Not  believing  that  the  consumer  should 
sustain  these  contributions  (which  had  no  relation  to'  the  service 
of  furnishing  electricity),  but  that  they  should  come  out  of  the 
Company’s  profits,  these  items  have  been  rejected  from  Advertising 
Expense.  In  Capital  Account  certain  items  of  real  estate  are  re- 
jected because  of  their  apparent  non-use  in  Company  operation,  as 
shown  in  table  No.  7.  Accordingly  the  expense  of  these  items 
has  been  adjusted. 

The  Company  in  its  operation  requires  the  use  of  electric  and 
gasoline  delivery  wagons,  trucks  and  passenger  conveyances,  for 
the  use  of  which  each  department  is  billed  according  to  its  de- 
mands. During  the  year  1911  the  total  expense  of  the  transporta- 
tion department  was  $307,498,  of  which  $243,522  was  distributed 
among  the  departments  as  representing  their  demands  upon  the 
service.  This  left  a balance  of  $63,976  undistributable.  Of  this 
amount  $58,377  represented  new  equipment  purchased,  and  inas- 
much as  this  equipment  has  an  ordinary  life  of  from  three  to  eight 
years,  this  item  was  rejected  from  expense  and  equipment  purchased 
since  the  date  of  consolidation,  capitalized  under  the  heading  of 
Unclassified  District  Installation,  the  balance,  $5,599,  being  charged 
under  the  heading  of  Miscellaneous  Expense.  An  allowance  for  de- 
preciation of  equipment  is  included  in  the  annual  depreciation 
allowance. 

Under  the  account  heading  of  Interest,  Discount  and  Exchange, 
the  Company  has  charged  the  amounts  paid  for  interest  on  prepaid 
stock  subscriptions  and  interest  on  a real  estate  mortgage  of  $130,- 
000.  Inasmuch  as  these  items  are  in  reality  a part  of  the  return 


59 


on  the  investment  to  be  allowed  and  correspond  to  bond  interest 
and  dividends,  they  have  been  excluded  from  expense. 

During  the  year  1911  the  Company  set  aside  $60,000  as  a con- 
tribution to  the  Employes’  Pension  Fund.  This  amount  has  been 
included  in  Miscellaneous  Expense.  In  1912  the  company  increased 
the  monthly  contribution  from  $5,000  to  $6,000,  making  the  total 
allowance  in  1912,  $72,000,  which  is  shown  in  the  detailed  ex- 
pense statement  of  that  year. 

In  arriving  at  the  total  Capital  Account,  under  the  heading 
of  Brokerage,  discount  on  securities  has  been  rejected  as  an  item 
for  capitalization.  Allowing  discount  on  securities  is  in  effect  is- 
suing them  at  a higher  rate  of  interest  than  is  indicated  on  the  face 
of  the  security.  Such  loss  should  properly  be  distributed  over  the 
life  of  the  security.  From  such  figures  as  have  been  available  it 
is  estimated  that  on  all  bonds  sold  the  company  has  not  sustained 
an  average  loss  of  over  five  points.  This  on  $32,000,000,  the  pres- 
ent amount  outstanding,  would  be  $1,600,000,  which  spread  over  a 
period  of  40  years  would  equal  $40,000  per  year.  The  company  is 
writing  off  $39,114  per  year,  which  has  been  allowed  in  the  ex- 
pense as  approximately  the  proper  amount. 

Examination  of  Company’s  payrolls  shows  that  salaries  and 
wages  are  not  excessive  for  service  rendered. 

Tables  Nos.  10  and  11  show  revised  expenses  for  the  years 
1911  and  1912. 


TABLE  NO.  10. 

TOTAL  EXPENSE  (EXCLUSIVE  OF  DEPRECIATION)  FOR  THE  CALENDAR  YEAR  1911. 


60 


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■ Advertising  226,550.  3.23  . 081633  . 035380 

Wiring  and  Appliances 20,700.  .30  . 002903  . 003247 


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TOTAL  EXPENSE  (EXCLUSIVE  OF  DEPRECIATION)  FOR  THE  CALENDAR  YEAR  1912. 


62 


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64 


DEPRECIATION  ALLOWANCE. 

As  explained  on  page  35,  depreciation  is  dependent  on  wear, 
natural  deterioration,  inadequacy  and  obsolescence.  Other  factors 
which  sometimes  operate  to  depreciate  certain  portions  of  an  elec- 
tric lighting  system  are  municipal  regulations  and  improvements. 
The  municipality  may  extend  the  limits  of  underground  distribu- 
tion, order  the  removal  of  electric  signs  or  private  street  lighting 
fixtures,  or  by  the  construction  of  a subway  system  or  similar  muni- 
cipal improvements,  require  reconstruction  involving  a large  ex- 
pense. 

While  the  investor  who  risks  his  capital  in  the  electric  light- 
ing business,  as  in  any  other,  must  take  some  chances  of  loss  oc- 
casioned by  unforseen  circumstances,  it  is  only  fair  that  his  in- 
vestment should  be  protected  to  a reasonable  extent  against  prob- 
able heavy  demands  in  the  future.  In  order  to  reduce  such  risk 
and  maintain  fair  and  uniform  rates  it  is  now  customary  to  provide 
a fund  to  offset  estimated  future  as  well  as  present  depreciation. 
Therefore,  in  order  to  do  justice  to  the  investor  as  well  as  to  the  con- 
sumer, who  would  object  to  having  his  rates  raised  whenever  it  be- 
came necessary  for  the  replacement  of  an  extensive  portion  of  the 
plant,  it  is  obvious  that  a portion  of  the  earnings  should  be  annually 
set  aside  as  a depreciation  reserve. 

The  creation  and  administration  of  the  depreciation  reserve 
has  been  a subject  of  much  discussion  by  public  utility  operators 
and  economists.  Generally  it  may  be  stated  that  there  are  three 
principal  methods  or  policies  of  handling  depreciation  from  a com- 
pany’s accounting  standpoint. 

First : To  charge  to  earnings  in  good  years  and  credit  to  de- 
preciation reserve  such  amounts  as  the  profits  from  operation  per- 
mit. 

Second : To  charge  to  earnings  the  depreciation  as  it  ma- 
tures and  necessitates  renewals. 

Third : To  charge  to  earnings  and  credit  to  depreciation  re- 
serve annually  a certain  percentage  of  the  cost  determined  by  the 
average  weighted  life  of  the  property. 

The  tendency  of  all  companies  is  to  use  the  first  method,  because 
its  practice  aids  in  maintaining  regularity  of  published  earnings 
and  dividend  distributions.  This  writing  off  of  an  arbitrary  amount 
at  any  time,  depending  upon  earnings  or  financial  requirements, 
is  a poor  policy  from  the  standpoint  of  rate  regulation,  because  it 
does  not  express  true  conditions  and  is  susceptible  of  being  used 
to  create  hidden  assets  or  neglect  the  liability  of  accrued  deprecia- 
tion. 

The  second  method  is  the  improvident  practice  used  by  many 
companies,  in  former  years  more  than  at  present.  Inasmuch  as  it 
neglects  providing  for  the  old  age  of  the  property,  it  is  equivalent 
to  returning  to  stockholders  as  dividends  the  capital  they  have 
invested,  thus  placing  the  company  in  a position  when  the  prop- 
erty has  deteriorated  and  consumed  its  capital,  of  requiring  new 
funds  for  rebuilding,  and  as  a consequence  over-capitalizing. 


65 


In  general  accounting  practice,  and  particularly  in  rate  regula- 
tion, an  average  annual  depreciation  allowance,  based  on  the  orig- 
inal cost  of  the  property  less  salvage  or  junk  value,  spread  over  a 
period  of  years  approximating  the  weighted  life  of  the  plant,  is 
considered  proper. 

If  depreciation  is  considered  in  its  broadest  sense  to  include 
the  maintenance  which  is  charged  to  expense  directly,  it  would  be 
proper  to  set  aside  as  a reserve  a fixed  percentage  of  the  decreasing 
value  of  the  plant  to  represent  the  unmatured  decadence.  This  ideal 
situation  would  equalize  the  total  burden  over  the  life  by  making 
the  depreciation  allowance  largest  when  the  repairs  are  smallest, 
and  conversely  the  depreciation  allowance  smallest  when  the  re- 
pairs are  largest  at  the  end  of  the  useful  life  of  the  plant.  If  the 
system  were  composed  of  many  small  units  not  requiring  renewal 
at  or  near  the  same  time,  no  special  depreciation  reserve  would  be 
necessary,  as  all  replacements  could  be  charged  directly  to  operat- 
ing expense,  because  of  their  inconsiderable  amount  in  any  one 
year.  This  condition  exists  in  large  railroad  systems  where  the 
principal  depreciable  investment  consists  of  thousands  of  small 
units  of  rolling  equipment  and  a roadbed  sufficiently  extended  so 
that  wear  is  distributed  and  can  be  offset  by  continuous  repair. 

In  the  electric  lighting  business,  however,  a considerable  por- 
tion of  the  plant  is  composed  of  large  units  which  the  rapid  devel- 
opment of  the  art  and  growth  of  business  render  inadequate  long 
before  their  natural  life  has  expired.  As  a result  of  and  to  provide 
for  this  condition,  depreciation  reserves  are  accumulated,  either  on 
the  straight  line  method,  which  is  determined  by  dividing  the  orig- 
inal cost  less  salvage  by  estimated  life  in  years,  or  by  the  sinking 
fund  method,  which  consists  in  laying  aside  a certain  annual 
amount,  which  with  the  accumulated  interest  would  at  the  end  of 
the  estimated  life  equal  the  original  cost  less  the  salvage  value. 
The  sinking  fund  method  has  been  used  in  this  report,  for  the  rea- 
son that  an  actual  amount  set  aside  and  not  disbursed  in  dividends 
should  earn  interest,  regardless  of  whether  the  cash  so  retained  is 
considered  as  a trust  fund  and  invested  in  securities,  or  used  in  the 
conduct  of  the  business  by  the  Company  itself,  in  iieu  of  securing  or 
borrowing  additional  funds  and  paying  interest  thereon.  Table  No. 
12  is  calculated  on  a 3 per  cent  sinking  fund  basis.  The  percentage 
of  original  cost  set  aside  annually  for  depreciation  from  all  or- 
dinary causes,  together  with  the  estimated  salvage  value  and  life 
of  the  various  classes  of  property  of  the  Company  are  set  forth 
therein.  Calculated  on  this  basis,  the  average  weighted  life  of 
the  Company’s  depreciable  property  is  18.52  years. 

The  table  also  shows  the  figures  used  by  Bvllesby  & Company 
in  the  Company’s  appraisal,  calculated  on  a straight  line  basis  and 
making  no  allowance  for  estimated  future,  obsolescence  or  inad- 
equacy. The  amount  necessary  to  set  aside  for  depreciation  during 
the  year  1911,  based  on  the  above  table,  is  $1,987,252,  the  detail 
of  which  is  shown  in  table  No.  13.  Ordinarily  the  Company  does  not 
estimate  the  amount  set  aside  for  depreciation  on  a basis  similar 


66 


to  the  above,  but  charges  over  a short  period  of  years,  and  to  the 
current  year  if  possible,  replacements  as  they  are  made,  but  in 
addition  to  this  creates  a depreciation  reserve  of  $17,000  annually 
for  each  one  million  dollars  of  bonds  outstanding.  It  is  a rule  of 
the  Company  to  charge  to  depreciation,  only  cost  less  scrap  value 
of  investment  which  is  replaced  by  improved  or  more  efficient 
apparatus,  other  renewals  being  charged  in  operating  expense  to 
maintenance.  However,  practically  all  renewals  during  recent 
years  have  been  charged  to  depreciation  because  of  the  continuously 
changing  type  of  investment.  The  renewal  of  poles  and  other  over- 
head construction,  iron  pipe  conduit,  etc.  (items  which  apparently 
have  reached  a standard  construction) , are  charged  to  maintenance 
on  the  basis  of  the  Company’s  present  practice.  In  calculating  the 
allowance  for  depreciation  for  this  report  these  items  were  in- 
cluded because  of  the  fact  that  during  1911  there  was  practically 
nothing  charged  to  maintenance  on  the  Company’s  books  on  this 
account,  due  to  the  comparatively  new  construction  of  this  part  of 
the  system.  Inasmuch  as  the  above  mentioned  depreciation  allow- 
ance is  used  in  preparation  of  a basis  for  rate  determination  for 
future  years,  it  is  considered  fair  to  allow  therein  for  replacement 
of  all  depreciable  property.  This  allowance  of  $1,987,252  can, 
therefore,  be  designated  a renewal  as  well  as  depreciation  allow- 
ance. 

For  future  rate  regulation  it  would  be  desirable  to  have  a more 
detailed  separation  between  repairs  and  renewals  in  the  Company’s 
accounting. 


67 


TABLE  NO.  12 
DEPRECIATION. 


USED  IN  COMPANY 
APPRAISAL. 

, — Straight  Line  Basis. — , 

Net  Deprecia- 

Life.  Salvage.  tion,  % 

USED  IN  THIS 
REPORT. 

3%  Sinking  Fund  Basis. 

Net  Deprecia- 
Life.  Salvage,  tion,  % 

UNDERGROUND  SYSTEM— 

Conduit,  Tile  and  Stone.  n 

100 

1.0 

47 

1.0 

Conduit,  Iron  Pipe  

30 

3.33 

13 

6.4 

Conduit,  Dorset  

25 

2.7 

Conduit,  National  

SSYs 

3. 

25 

2.7 

Conduit,  Pump  Log  

18 

4.3 

Conduit,  Lithosite  

331/a 

3." 

25 

2.7 

Conduit,  Fibre  Pipe  

331/3 

3. 

20 

3.7 

Conduit,  Waukesha  Pipe  Line 

25 

2.7 

Conduit,  Francis  

100 

1.’ 

47 

l’.O 

Manholes  

100 

1. 

47 

1.0 

Edison  Tube  System 

29 

11.45 

3.05 

17.5 

10 

4.0 

Cable  Distribution  System 

50 

52.67 

.95 

19 

50 

2.0 

25  Cycle  Feeders  ( 9,000  V.) 

50 

56.31 

.87 

17.5 

40 

2.65 

25  Cycle  Feeders  (20,000 V.) 

16 

30 

3.5 

60  Cycle  Feeders  (12,000  V.) 

50 

45.32 

i!o9 

17 

40 

2.75 

60  -Cycle  Transformers 

26 

16.55 

3.34 

16 

15 

4.2 

Tunnels  

100 

1. 

47 

1.0 

OVERHEAD  SYSTEM— 

Poles  

15 

15. 

5.67 

14 

15 

5.0 

Arms  and  Pins  

12 

8.33 

11 

7.8 

Insulators  and  Pot  Heads 

. 20 

5.0 

.19 

4.0 

Wires  and  Services  

12 

39.32 

5.06 

12 

39 

4.3 

Lightning  Arresters  

. 8 

12.5 

8 

11.2 

Line  Cut  Outs  

. 10 

10. 

8 

11.2 

Ground  Connections  — 

15 

6.67 

14 

5.9 

Transformers  

. 25 

9. 

3.64 

16 

’9 

4.5 

GENERATINNG  STATIONS— 

Building  Harrison  Street 

150 

.67 

35 

1.65 

^Building  Washington  Street 

150 

.67 

35 

1.65 

Buildings,  Other  Stations 

150 

.67 

40 

1.33 

Cranes  

50 

2.00 

40 

1.33 

Coal  Bins  

35 

2.86 

1 

Coal  and  Ash  Handling  Machinery 

1 

Boilers  

30 

3.33 

1 

Stacks  

. 30 

3.33 

1 

Breechings  

25 

4. 

1-  15.5 

4 

5.0 

Pumps  and  Heaters 

35 

2.86 

1 

Piping  

. 30-35 

3.33-2.861 

Turbines,  Engines  and  Generators 

35 

. 2 . . . 

2.86 

Switchboards  and  Wiring 

. '50 

2. 

J 

SUBSTATIONS— 

Buildings  

.150 

.67 

35 

1.65 

Irremovable  Investment  on  Leased  'Prem 

ises  • 

.150 

.67 

16 

5.0 

Rotary  Converters  

. 45 

10. 

• 2-  1 

Motor  Generators  

. 36 

10. 

2.5  I 

Oil  Switches  

22.5 

10. 

4.  L 

18 

10 

3.8 

Transformers  and  Regulators 

. 22.5 

10. 

4-  | " 

Switchboards  and  Wiring  

. 45 

10. 

2.  I 

Miscellaneous  

. 20 

5.  J 

Storage  Batteries  

18 

10 

3.8 

MISCELLANEOUS  BUILDINGS— 

Adams  Street  Office  Building 

30 

2.1 

Miscellaneous  Buildings  

25 

2.74 

Signs  

. 25 

4." 

6 

15.5 

Meters  (Customers)  

. 66.7 

1.5 

16 

5 

4.7 

Arc  Lamps  

. 33.3 

3. 

10 

8 

8. 

Horses,  Wagons,  Autos,  Miscellaneous. 

7 

5 

12.4 

Incandescent  Lamps  

Renewals  charged  to 

Maintenance. 

Free  Wiring  

4 

23.9 

Tungsten  Posts  and  Fixtures 

4 

23.9 

* Now  used  for  laboratory  and  repair  shop. 


68 

TABLE  NO.  13. 

ESTIMATED  ANNUAL  ALLOWANCE  FOR  DEPRECIATION  FROM  ALL 
CAUSES  FOR  THE  YEAR  1911. 


Annual 

Depreciation 

Allowance. 

Per  Cent 
of  Original 
Cost. 

Per  Cent 
of  Present 
Value. 

Generating  Stations — 

Harrison  Street  

$ 129,505 

3.91 

5.17 

Fisk  Street  

350,389 

3.67 

3.85 

Quarry  Street  

195,810 

3.89 

3.98 

^Washington  Street  

5,966 

1.71 

2.22 

•59th  and  Wallace  Streets 

24,051 

3.43' 

4.32 

Substations  and  Substation  Buildings 

190,066 

3.28 

3.49 

Adams  Street  Office  and  Miscellaneous  Buildings 

18,686 

2.31 

2.59 

Storage  Batteries  

95,910 

3.80 

3.97 

Conduits  and  Tunnels  and  Underground  Lines 

397,396 

2.43 

2.75 

Overhead  Lines  and  Line  Transformers 

198,075 

4.83 

5.57 

Meters  (Customers’)  

172,935 

4.70 

4.95 

Signs  

43,781 

15.50 

17.18 

Arc  Lamps  

12,946 

8.00 

10.08 

Unclassified  District  Installations,  including  horses, 
wagons,  automobiles,  furniture,  movable  tools, 
laboratory  equipment,  repair  shop  equipment,  in- 
candescent lamps,  tungsten  fixtures  and  posts,  and 

free  wiring  

145,736 

8.64 

13.27 

Total,  including  Real  Estate 

$1,987,2152 

3.45 

3.81 

Total,  excluding  Real  Estate 

$1,987,252 

3.63 

4.04 

* Now  used  for  laboratory  and  repair  shop. 


RATE  OF  RETURN. 

In  a number  of  water  supply  and  railroad  rate  cases  decided  by 
the  courts  a rate  of  5 per  cent  on  the  actual  investment  has  been 
held  not  confiscatory.  A rate  which  is  not  confiscatory  does  not 
necessarily  mean  a fair  and  equitable  rate  to  the  investor,  but  rather 
a rate  which  permits  the  existence  of  the  utility. 

In  gas,  electric  and  telephone  cases,  5 to  6 per  cent  seems 
about  the  minimum  rate  allowed  by  the  courts.  Public  service  com- 
missions have,  in  general,  been  somewhat  more  liberal  than  the 
courts  and  their  decisions  permit  somewhat  higher  return  on  the 
actual  investment  tnan  the  prevailing  interest  rates. 

In  the  recent  street  railway  case  of  The  Milwaukee  Electric 
Railway  and  Light  Company,  a 71/2  per  cent  rate  was  fixed  by  the 
Wisconsin  Railroad  Commission. 

The  ruling  of  the  Wisconsin  and  New  York  commissions  in 
gas  cases  has  been  71/2  per  cent,  and  in  electric  and  telephone  cases 
8 per  cent.  In  no  case  has  the  property  whose  rates  these  bodies 
have  regulated  approached  in  size  the  one  hereunder  considered. 

Unquestionably  capital  can  be  attracted  to  large  properties 
on  more  favorable  terms  than  to  small  ones  of  proportionate  value 
and  efficiency,  so  that  the  rate  of  return  need  not  necessarily  be 
as  high  in  the  case  of  a utility  like  the  Commonwealth  Edison  Com- 
pany, with  fairness  to  the  investor,  as  in  the  case  of  smaller  prop- 
erties. Nevertheless  the  return  should  not  be  fixed  so  low  as  to 
retard  the  natural  supply  of  capital  necessary  for  future  require- 
ments. A little  consideration  will  show  that  the  rate  of  return 
should  be  somewhat  above  the  average  interest  rates  on  the  high- 
est grade  securities  in  order  to  attract  investors  and  to  furnish  an 
incentive  for  developing  the  business,  which  in  the  end  means  good 
service  to  the  consumer  at  a minimum  cost. 


69 


Capital  is  doubtless  entitled  to  returns  commensurate  with  the 
risks  incident  to  the  business.  The  pioneers  in  the  public  utility 
field  should  have,  and  in  most  cases  have  received,  returns  largely 
in  excess  of  what  would  be  considered  a fair  return  on  these  same 
investments  today.  But  it  should  not  be  supposed  that  the  early 
large  returns  should  be  continued  when  the  development  of  the  busi- 
ness, the  elimination  of  competition  and  the  necessities  of  the  com- 
munity have  largely  reduced  the  risk  of  the  investment. 

While  the  Commonwealth  Edison  Company  can  obtain  a cer- 
tain amount  of  capital  for  its  needs  by  issuing  5 per  cent  bonds,  at 
practically  par,  it  does  not  follow  that  this  method  of  financing 
would  be  the  most  desirable  to  follow  exclusively.  In  order  to 
make  a sufficiently  good  showing  to  enable  these  bonds  to  com- 
mand that  figure,  there  must  be  a large  equity  in  the  property  and 
the  net  earnings  after  all  operating  expanses  and  fixed  charges  are 
deducted,  must  be  considerably  in  excess  of  the  bond  interest  re- 
quirements. In  addition,  the  management  should  be  largely  inter- 
ested as  stockholders,  i.  e.,  owners,  to  assure  best  operation. 

From  1887  to  1889  the  first  two  years  of  the  Chicago  Edison 
Company’s  history,  no  dividends  were  paid  to  the  stock  holders. 
From  that  time  up  to  the  consolidation  with  the  Commonwealth 
Electric  Company  the  annual  dividends  of  the  Chicago  Edison  Com- 
pany were  8%.  The  Commonwealth  Electric  Company  never  paid 
any  dividends  during  its  life  from  1897  to  1907.  When  the  con- 
solidation went  into  effect  Chicago  Edison  stockholders,  for  whom 
the  stock  of  the  Commonwealth  Electric  Company  was  held  in 
trust,  received  shares  in  the  new  Company  to  the  extent  of  160% 
of  their  individual  holdings  in  the  Chicago  Edison  Company.  This 
distributed  the  stock  equity  in  the  Commonwealth  Electric  Com- 
pany. 

Dividends  were  paid  on  the  Commonwealth  Edison  Company 
stock  at  the  rate  of  5 per  cent,  until  November  1st,  1908,  when  the 
rate  was  raised  to  6 per  cent.,  and  then  to  7 per  cent,  on  May  1, 
1911.  As  a result  the  stockholders  in  the  old  Chicago  Edison  Com- 
pany are  now  receiving  11.2  per  cent  return  on  the  par  value  of 
their  original  investment,  or  an  increase  of  40  per  cent. 

While  rate  regulation  is  of  advantage  to  the  consumer  it  is 
not  embarrassing  to  the  Company  if  properly  handled.  But  if  all 
profits  above  low  interest  returns  on  the  investment  in  actual  use 
were  devoted  to  rate  reduction,  there  would  be  little  incentive  on 
the  part  of  the  Company  toward  introduction  of  economies  in  opera- 
tion. 

After  due  consideration  has  been  given  all  factors  bearing  on 
the  question,  a rate  not  greater  than  7 per  cent,  seems  reasonable 
as  a fair  return  on  the  actual  investment  in  this  case.  The  rela- 
tive proportions  of  stock  and  bonds  of  the  total  investment  is  a 
factor  which  has  a direct  bearing  on  the  question  of  rate  of  re- 
turn. Figure  10  is  of  interest  as  it  enables  the  return  on  the 
stock  to  be  seen  at  a glance  when  the  rate  on  the  whole  property 
is  known,  assuming  that  the  bonds  bear  5 per  cent,  interest. 


70 


DIAGRAM  NO.  10. 


IOO  90  ao  70  60  50  AO  30  20  iO 

°/o  CAPJTAL  REPRESENTED  5/  BONDS 


O 


TABLE  NO.  14. 


71 


NOTE — Figures  in  parentheses  denote  relative  rank. 


72 


Table  No.  14  sets  forth  the  investment  and  earnings  of  the 
various  local  public  utilities,  as  obtained  from  published  state- 
ments. The  amounts  representing  net  income  from  operation  are 
before  interest  payments  and  divisions  of  profits  by  ordinance  pro- 
vision or  otherwise.  This  table  is  included  to  furnish  a basis  for 
approximate  comparisons  of  the  different  classes  of  business  and 
to  show  the  rate  of  return  on  the  investment  figures  in  the  Com- 
pany’s records. 

Diagram  No.  11  illustrates  the  variation  in  rate  of  return 
as  shown  by  the  Commonwealth  and  Edison  and  Commonwealth 
Edison  Companies’  published  statements. 


73 


PLANT  INVESTMENT. 


SOME  PRINCIPLES  OF  RATE  MAKING. 

The  Act  of  the  State  Legislature  passed  in  1905,  conferring 
upon  the  City  of  Chicago  the  authority  to  fix  the  rates  for  the  sup- 
ply of  gas  and  electricity,  specifically  states  that  rates  must  be  just 
and  reasonable.  The  obligation  resting  upon  any  public  utility 
corporation  operating  under  a franchise  or  grant  from  a municipal- 
ity, in  the  absence  of  express  provisions  therein  governing  the  same, 
is  to  furnish  service  to  all  of  the  inhabitants  who  may  apply  for  it 
at  reasonable  rates  and  without  unjust  discrimination. 

The  question  of  rates  for  supplying  electricity  has  received 
much  study  by  public  utility  operators  and  in  general  the  rates 
employed  are  determined  on  a more  scientifically  correct  basis  than 
other  public  utility  rates.  This  condition  has  been  made  impera- 
tive by  entering  a field  apparently  well  covered  by  gas  and  the 
necessity  of  developing  business  along  other  lines  than  lighting. 

Electricity  cannot  be  economically  stored  like  gas  and  its  use 
for  most  purposes  is  confined  to  short  periods  during  the  24  hours 
and  a large  proportion  of  the  consumers  make  their  greatest  de- 
mands upon  the  system  at  the  same  time.  For  this  reason  the 
generating  plant  as  well  as  the  distribution  system  must  be  capable 
of  furnishing  the  maximum  instantaneous  demand  which  is  liable 
to  be  imposed  upon  it  by  the  consumers  and  therefore  the  invest- 
ment must  be  as  large  as  though  the  full  capacity  of  the  plant  was 
utilized  throughout  the  24  hours.  The  annual  load  factor  of  the 
Edison  Company’s  plant  (ratio  of  average  to  maximum)  based  on 
rated  capacity  is  about  3114  per  cent.,  which  is  considerably  higher 
than  that  of  most  companies  in  other  cities.  As  a result  of  the  com- 
paratively short  hours  use  of  the  rated  capacity  of  the  plant  a 
large  proportion  of  the  total  expense  of  furnishing  the  service 
consists  of  interest,  taxes  and  certain  expenses,  which  remain 
constant  regardless  of  the  amount  of  electricity  supplied  and  the 
resulting  income. 

It  is  readily  seen  that  for  a rate  schedule  to  be  just  to  all 
users,  regardless  of  the  number  of  hours  of  service  they  demand 
of  the  plant,  the  fixed  costs  should  be  so  incorporated  in  the  rate 
schedule  that  every  consumer  pays  fixed  charges  as  well  as  the 
operating  expense  on  the  investment  which  his  service  requires. 
As  an  example,  if  one  consumer  has  20  lamps,  all  of  which  are 
used  at  one  time,  he  should  pay  four  times  as  large  a fixed  charge 
as  one  who  uses  only  five  lamps  at  a time,  because  the  invest- 
ment required  by  the  Company  to  furnish  the  service  is  approxi- 
mately four  times  as  great.  If  the  rate  for  electricity  was  a fixed 
amount  per  unit  of  consumption,  then  the  first  consumer  might 
use  his  lamps  one  hour  per  day  and  the  other  burn  his  lamps  four 
hours  per  day  and  the  resulting  bill  would  be  the  same  in  each 
case.  One  consumer  pays  as  much  as  another  although  the  amount 
of  investment  required  in  the  first  case  is  nearly  four  times  as 
great  as  in  the  second.  Thus  it  is  seen  that  the  flat  rate  per  unit 
of  consumption  discriminates  against  the  consumer  who  makes  the 
greatest  use  of  his  demand  upon  the  system. 


There  are  five  methods  in  common  use  in  the  United  States  for 
determining  the  charge  for  electric  service. 

Flat  Rate  Per  Unit  of  Connected  Load : 

This  is  a relic  of  the  old  method  of  charging  for  water  by 
assessment  or  frontage  basis  and  is  not  suitable  for  electric  rates 
except  in  special  cases  of  hydro-electric  plants  where  the  operating 
expense  is  a very  small  proportion  of  the  total  cost  of  service. 
This  system  is  not  always  economical  for  water  supply  systems. 

Flat  Rate  Per  Unit  of  Consumption : 

This  method  corresponds  to  the  system  generally  adopted  of 
charging  for  metered  gas,  water,  etc.,  and  for  electricity  is  gener- 
ally a more  equitable  method  than  the  one  above  mentioned,  but 
is  open  to  objection  because  it  discriminates  against  the  long  hour 
consumer,  as  explained  above. 

The  Wright  Demand  System  : 

Under  this  method  a certain  primary  or  high  rate  is  charged 
for  the  first  hour’s  daily  use  of  the  customer’s  maximum  demand 
and  a lower  or  secondary  rate  for  additional  use.  The  primary  rate 
is  sometimes  applied  to  a fixed  number  of  hours’  use  per  month  of 
the  maximum  demand. 

The  Hopkins  on  System : 

This  consists  of  a fixed  charge  per  unit  of  either  connected  load 
or  maximum  demand  plus  a kilowatt  hour  charge  for  the  current 
consumed. 

The  Doherty  System : 

This  method  imposes  first,  a monthly  fixed  charge  for  all 
customers  regardless  of  the  size  of  their  installation  or  current 
consumption.  This  charge  is  to  cover  meter  reading  and  main- 
tenance, accounting,  collecting  and  all  other  expenses  which  are 
practically  the  same  for  all  customers.  Second,  a charge  deter- 
mined by  .the  customer’s  connected  load  or  maximum  demand. 
Third,  a charge  per  kilowatt  hour  for  current  consumption.  This 
system  is  theoretically  the  most  correct,  but  lacks  the  simplicity 
of  the  other  methods  mentioned. 

Various  combinations  and  modifications  of  the  above  outlined 
systems  of  rates  have  been  provided  for  special  cases.  The  Wright 
Demand  System  has  been  employed  by  the  Commonwealth  Edison 
Company  for  retail  lighting  and  power  since  1898.  The  Hopkin- 
son  System  is  used  by  the  Company  for  wholesale  light  and  power 
and  for  railway  and  bulk  supply  customers. 

For  further  reference  to  the  application  of  the  Wright  Demand 
System  of  charge  is  used  by  the  Commonwealth  Edison  Company, 
see  appendix. 

Rate  Schedules. 

While  it  is  impracticable  to  calculate  the  cost  of  serving  each 
individual  consumer,  the  cost  of  supplying  some  classes  of  con- 


7G 


sumers  under  the  average  existing  conditions  can  be  approximated. 
Some  of  the  varying  factors  which  introduce  complications  in  cost 
figuring  are  character  of  installations,  ratio  of  maximum  demand 
to  connected  load  and  to  average  load,  time  of  day  and  of  the 
year  on  which  the  maximum  demand  occurs,  diversity  between 
consumers  of  each  class  and  of  different  classes.  Many  of  the 
factors  entering  into  the  cost  of  supply  are  of  such  a character  that 
it  is  difficult  to  apportion  them  to  the  different  classes  of  consumers 
as  they  are  determined  by  the  Company’s  business  as  a whole. 

The  Company  must  so  fix  its  rates  that  the  total  revenue  is 
sufficient  to  provide  for  operating  expenses,  fixed  charges  and  a 
profit  on  the  investment.  In  making  rates  for  large  consumers 
the  Company  is  limited  by  the  amount  it  would  cost  the  customer 
to  supply  his  own  service,  or,  in  other  words,  the  large  consumer 
might  be  considered  a competitor  of  the  Company  for  his  own 
business.  While  a much  higher  rate  could  be  charged  the  small 
consumer  before  reaching  a point  where  he  could  afford  to  furnish 
the  service  himself,  the  rate  is  to  a certain  extent  regulated  by  the 
cost  of  other  forms  of  illumination  or  power. 

In  establishing  rate  schedules  which  are  fair  to  the  public, 
and  which  will  result  in  the  maximum  revenue  to  the  Company, 
there  are  certain  fundamental  principles  which  should  be  ob- 
served : \ 

First:  Classification  of  rates  should  be  based  on  differences 
in  conditions  of  service. 

Second:  The  rate  for  each  class  of  service  should  bear  a 
reasonably  close  relation  to  the  cost  of  serving  that  class. 

Third : Some  individual  consumers  of  each  class  may  be 
served  at  a loss  but  the  class  as  a whole  must  be  profitable. 

Fourth:  Any  rate  must  not  be  greater  than  it  would  cost 
the  consumer  to  provide  equivalent  service  from  other  sources. 

Fifth : Any  system  of  rates  must  conform  to  commercial  re- 
quirements in  order  to  attract  and  hold  business  and  bring  a rea- 
sonable return. 

Sixth : The  various  rate  schedules  should  be  as  simple  as 
possible,  so  that  they  can  be  understood  by  the  consumer  to  whom 
each  schedule  applies. 

Seventh : Although  special  classes  of  business  should  be 
sought  after  if  profitable,  the  service  should  not  be  unjustly  dis- 
criminatory in  relation  to  other  classes. 

DETERMINATION  OF  FAIR  MAXIMUM  RATES. 

The  cost  of  supply  to  consumers  paying  the  maximum  rate 
cannot  be  directly  determined  with  sufficient  accuracy  to  obtain 
undebatable  conclusions  with  the  data  available,  as  will  be  shown 
later.  It  is,  therefore,  necessary  to  investigate  rates  other  than 
the  maximum  to  such  extent  as  to  demonstrate  that  they  do  not 
shift  an  unfair  burden  upon  consumers  paying  the  maximum  rate, 
resulting  in  unjust  discrimination.  A proper  consideration  of  all 
of  the  factors  will  then  enable  fair  maximum  rates  to  be  deter- 
mined. 


77 


Reference  to  table  No.  8 indicates  that  over  two-thirds  of 
the  Company’s  output  for  1911  was  furnished  to  railway  and  bulk 
supply  customers,  and  brought  a revenue  of  less  than  one-fourth 
of  the  total,  thus  indicating  that  the  cost  of  supplying  this  busi- 
ness should  be  investigated. 

WHOLESALE  RATES. 

The  obtaining  of  large  wholesale  and  bulk  supply  business 
is  advantageous  to  the  Company,  not  only  from  the  standpoint  of 
increased  load  factor  (ratio  of  average  to  maximum  load),  but  on 
account  of  the  relatively  small  amount  of  general  expense  involved 
and  also  in  that  contracts  for  this  business  usually  cover  a long 
term  of  years  and  provide  for  a fixed  minimum  charge,  protecting 
the  Company  in  the  necessary  investment.  As  these  contracts  are 
based  on  a maximum  demand,  the  consumers  endeavor  to  keep 
down  their  peak  loads,  distributing  the  use  of  current  over  longer 
periods  and  automatically  improving  the  load  factor,  thus  tending 
to  reduce  the  total  investment  as  well  as  the  production  cost  per 
kilowatt  hour.  The  reductions  in  retail  rates  during  the  past 
years  in  Chicago  have  partially  been  made  possible  by  this  business 
as  it  has  enabled  the  construction  of  mammoth  generating  plants 
and  distributing  systems  at  a lower  unit  cost  of  investment  and 
operation.  The  Commonwealth  Edison  Company,  by  offering  in- 
ducements in  the  way  of  special  rates  which  had  heretofore  been 
regarded  as  unreasonably  low  has  succeeded  in  obtaining  contracts 
to  furnish  approximately  77  per  cent,  of  the  power  requirements 
of  the  elevated  and  surface  railway  systems  of  Chicago.  The  oper- 
ating advantages  of  this  business  are  well  illustrated  by  Diagrams 
No.  12  and  No.  13  which  show  comparative  load  curves  of  the  Com- 
monwealth Edison  Company,  New  York  Edison  Company  and  the 
Edison  Illuminating  Company  of  Boston.  These  diagrams  are 
shown  on  the  basis  of  the  same  maximum  load  in  each  case  for  the 
day  of  the  greatest  maximum  demand  for  the  winter  of  1911-1912, 
so  that  comparisons  can  readily  be  drawn.  They  also  show  that 
the  Comonwealth  Edison  Company’s  load  factor  was  55.7  per  cent, 
as  compared  with  the  New  York  Edison  Company’s  44  per  cent,  and 
and  the  Boston  Company’s  44.3  per  cent.  Ten  years  previous,  when 
the  Chicago  Edison  Company  and  the  Commonwealth  Electric  Com- 
pany had  no  railway  load,  the  corresponding  figure  was  about 
43  per  cent.  The  New  York  and  Boston  companies  have  a small 
amount  of  railway  or  similar  load,  thus  showing  the  advantages  to 
the  Chicago  Company  resulting  from  this  class  of  business.  Dia- 
gram No.  14  shows  the  increase  of  annual  load  factor  (based  on 
maximum  load)  of  the  Company’s  system  for  various  years  for  rail- 
way, light  and  power  and  total  output. 

December  27th  was  the  day  of  the  maximum  load  on  the  Com- 
pany’s system  for  the  calendar  year  1911.  Diagram  No.  15  shows 
the  railway,  (which  includes  bulk  supply)  light  and  power  and 
total  output  for  this  date,  while  Diagram  No.  16  shows  the  distri- 
bution of  total  load  between  the  different  generating  stations  and 
the  power  purchased  from  other  companies.  These  diagrams  in- 


78 


dicate  that  the  railway  maximum  load  and  the  lighting  and  power 
maximum  do  not  occur  at  the  same  time,  resulting  in  a difference 
between  the  sum  of  the  separate  maxima  and  the  total  maximum 
which  is  known  as  the  diversity  and  in  this  instance  amounts  to 
3,740  K.  W.  In  other  words,  if  the  railway  load  were  supplied  from 
one  generating  system  and  the  lighting  and  power  load  from  an- 
other, the  combined  capacity  of  the  two  systems  would  have  to  be 
3,740  K.  W.  greater  than  when  the  supply  was  from  one  system  only. 


DIAGRAM  NO.  12 — COMPARATIVE  LOADS — NEW  YORK — CHICAGO. 


79 


The  15  minute  maximum  railway  load  for  the  year  1911  was 
118,952  K.  W.  occurring  Dec.  28th.  The  railway  load  at  5 :15  P.  M. 
Dec.  27th,  at  the  time  of  the  maximum  load  on  the  system  for  the 
year  was  only  112,120  K.  W.,  the  difference,  or  6,832  K.  W.  being 
the  diversity  between  railway  maximum  and  total  output  maximum 
for  the  year.  The  15  minute  maximum  light  and  power  load  for 
the  year  was  98,003  K.  W.  occurring  Nov.  28th,  but  on  Dec.  27th, 
at  the  time  of  the  yearly  system  maximum  it  was  only  85,650 

A.  M.  PM 

u 1 4 6 a 10  12  2 4 * 6 8 10  12 


80 


K.  W.  the  diversity  being  12,353  K.  W.  in  this  case.  The  grand 
total  of  diversity  between  the  railway  load  and  lighting  and  power 
is  19,185  K.  W.,  representing  a saving  in  investment  of  approxi- 
mately $1,500,000.  The  corresponding  figure  of  total  diversity  for 
the  winter  of  1911-12  is  22,991  K.  W.,  meaning  a saving  in  gener- 
ating station  investment  of  about  $1,800,000.  The  economic  ad- 
vantage of  one  electrical  generating  system  for  all  classes  of  supply 
is  thus  evident.  Corresponding  diversity  exists  between  lighting 
maximum  and  power  maximum  loads,  but  it  cannot  be  readily 
determined.  Diagram  No.  17  shows  the  railway,  light  and  power 
and  total  output  on  July  17th,  1911.  Diversity  between  light  and 
power  and  railway  in  this  case  is  much  greater,  as  the  railway 
peak  load  comes  between  the  power  peak  and  the  lighting  peak. 
The  lighting  and  power  peaks  are  very  nearly  coincident  in  winter, 
but  are  separated  in  summer. 

During  the  year  1911  power  supply  for  surface  and  elevated 
railways  was  furnished  at  9,000  volts,  3 phase,  25  cycle,  to  sub- 
stations within  a radius  of  approximately  10  miles  from  the  Fisk 
Street  Plant  and  at  20,000  volts  to  substations  at  a greater  dis- 
tance. The  transmission  system  is  owned  and  maintained  by  the 
Commonwealth  Edison  Company,  but  current  is  metered  at  the 
generating  plant.  The  Company  does  not  furnish,  maintain,  or 
operate  transforming  substations  and  apparatus  except  for  the 


DIAGRAM  NO.  14. — SHOWING  INCREASE  IN  TOTAL  LOAD  FACTOR  CAUSED 

BY  RAILWAY  LOAD. 


81 


DIAGRAM  NO.  15. — MAXIMUM  SYSTEM  LOAD — YEAR  1911. 


DIAGRAM  NO.  16. — STATION  LOAD  DISTRIBUTION  FOR  DAY  OF  MAXIMUM 
SYSTEM  LOAD — YEAR  1911. 


DIAGRAM  NO.  17. — LOAD  CURVE  FOR  TYPICAL  SUMMER  DAY 
— YEAR  1911. 

supply  of  current  to  the  Joliet  Lines  of  the  Public  Service  Company 
and  the  Chicago  Tunnel  Company,  which  latter  is  metered  on  the 
high  tension  side  at  substations  and  is  transformed  to  250  volts 
direct  current.  In  the  Plymouth  Place,  South  Chicago,  Grand 
Crossing,  Roseland  and  Troy  Street  substations  of  the  Common- 
wealth Edison  Company,  the  Chicago  City  and  affiliated  railway 
Companies  have  transforming  and  converting  apparatus  for  rail- 
way power.  The  railway  companies  pay  interest,  insurance,  depre- 
ciation, maintenance  and  operating  charges  for  the  proportion  of 
these  substations  which  they  occupy  in  addition  to  the  charge  for 
power.  This  amount  is  billed  separate  from  the  power  charge  and 
appears  on  the  books  of  the  Commonwealth  Edison  Company  as  a 
deduction  from  substation  operating  expense,  and  therefore  is  not 
charged  against  the  cost  of  railway  supply.  Sixty  cycle,  12,000 
volt,  3 phase  bulk  supply  energy  is  furnished  to  other  electric  com- 
panies. The  statistics  for  railway  and  bulk  supply  power  for  the 
calendar  year  1911  are  as  follows: 


83 


25 

CYCLE. 

One  Hour 

K.  W. 

Max.  K.  W. 

Hours. 

Chicago  & Oak  Park  Elevated  R.  R 

5,070 

15,818,260 

Northwestern  Elevated  R.  R 

6,200 

19,700,747 

Metropolitan  Elevated  R.  R 

6,600 

12,748,820 

Chicago  City  Railway 

47,482 

181,482,089 

Chicago  Railways  Company 

53,520 

198,552,856 

Public  Service  Co.  of  Northern 

Illinois, 

(Evanston)  

2,520 

5,766,592 

Total  of  above.  . . 

121,392 

434,069,364 

60 

CYCLE. 

Maximum 

K.  W. 

K.  W.  H. 

Public  Service  Co.  of  Northern 

Illinois 

(Maywood)  

815  (1  Hr.) 

59,889 

Public  Service  Co.  of  Northern 

Illinois 

(Joliet)  

2,280  '(%  Hr.) 

4,729,740 

Cosmopolitan  Electric  Company  . . 

152  Hr.) 

356,396 

5,146,025 

250  VOLT  DIRECT  CURRENT. 

One  Hour 

K.  W. 

Max.  K.  W. 

Hour. 

Chicago  Tunnel  Companv  

1,105 

4,212,711 

Total  railway  and  bulk  supply.  . . . 

443,428,100 

The  amount  of  investment  in  generating  stations  required  for 
this  business  is  determined  by  the  load  at  the  time  of  the  generating 
station  maximum  for  the  year  which  was  197,770  K.  W.  on  Dec. 
27th,  1911,  between  5 and  5:15  P.  M.  as  shown  on  diagram  No. 
15.  The  Railway  Load  at  this  time  was  112,120  K.  W.  or  62.86 
per  cent,  of  the  Quarry  and  Fisk  Street  stations  load  and  the  rail- 
way and  bulk  supply  business  is  accordingly  charged  with  that 
proportion  of  investment  in  these  stations.  Since  the  acquisition 
of  this  business  was  predicated  on  the  construction  of  new  gener- 
ating stations  with  very  large  and  highly  efficient  units,  the  cost 
of  this  business  is  not  properly  chargeable  with  any  portion  of 
the  investment  in  old  equipment.  The  economies  of  these  modern 
plants  are  shared  by  other  classes  of  business  which  are  not  of 
sufficient  magnitude  in  themselves  alone  to  warrant  their  con- 
struction. The  investment  in  underground  cable  chargeable  to 
this  business  is  readily  ascertained,  as  in  most  instances  a separate 
transmission  system  is  employed.  Underground  conduit  is  charged 
on  the  basis  of  cable  mileage  at  a unit  figure  corresponding  to  the 
latest  type  of  construction.  Substation  investment  is  determined 
by  the  maximum  requirements  of  the  Chicago  Tunnel  Company 
and  the  step  up  transformers  necessary  for  supplying  60  cycle 
service  to  the  Joliet  lines  of  the  Public  Service  Company  of  North- 
ern Illinois.  Transformers  for  the  20,000  volt,  25  cycle  railway 
supply  are  included  in  the  generating  station  figures. 


. 


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86 


SUMMARY  OP  INVESTMENT  AND  ALLOWANCE  FOR  DEPRECIATION  FOR  RAILWAY 
AND  BULK  SUPPLY  BUSINESS  FOR  THE  YEAR  1911. 

Present  Value  Depreciation 
of  Investment.  Allowance. 
Generating  stations,  including  land  and  trans- 


former house  $ 9,767,492  $348,062 

Conduit  729,148  7,659 

Transmission  lines  2,003,567  58,401 

Sub-stations  and  miscellaneous  88,405  3,506 


To^al  plant  $12,588,612  $417,628 

Working  capital,  including  coal  in  storage 568,000  


$13,156,612  $417,628 

Table  No.  15  shows  all  expense  of  furnishing  this  business 
except  the  annual  depreciation  allowance  as  indicated  above.  In 
arriving  at  the  cost  of  power  production,  allowance  has  been  made 
for  the  fact  that  the  load  factor  of  this  business  is  somewhat 
higher  than  that  of  the  whole  system. 

Total  expense  as  per  schedule 
Depreciation  allowance  

Total  cost  of  railway  and  bulk  supply 


for  1911  $2,499,686 

Total  income  $3,346,714 

Total  cost  2,499,686 


Net  return  $ 847,028=6.44%  on  the  investment. 


The  return  on  the  investment  for  this  business  is  materially 
less  than  the  return  on  the  total  of  investment  of  all  classes.  How- 
ever, on  account  of  the  benefits  accruing  to  the  business  as  a whole, 
due  to  these  large  contracts,  the  showing  is  not  considered  un- 
favorable nor  prejudicial  to  the  interests  of  the  small  consumer.  In 
estimating  the  cost  of  this  business  its  full  share  of  expense  has 
been  charged  in  all  cases  with  the  result  that  many  of  the  expense 
items  for  other  classes  of  business  have  been  reduced  below  a cor- 
responding figure,  which  would  result  if  the  company  did  not  have 
this  business. 

INVESTMENT  AND  EXPENSE  FOR  BUSINESS  OTHER  THAN  RAILWAY  AND 

BULK  SUPPLY. 

While  the  investment  required  to  furnish  ^lasses  of  service 
which  have  separate  transmission  and  distribution  systems  can 
readily  be  determined,  in  the  case  of  general  consumers  the  correct 
apportionment  of  the  investment  is  extremely  difficult,  owing  to 
the  fact  that  consumers’  individual  maximum  demands  do  not  all 
occur  at  the  same  time,  thus  requiring  less  investment  than  would 
otherwise  be  necessary.  The  ratio  of  the  sum  of  the  individual 
maxima  of  any  portion  of  the  system  to  the  combined  maximum  is 
known  as  the  diversity  factor.  A study  of  diversity  factors  was 
made  by  the  Comonwealth  Edison  Company  about  three  years 
ago.  Owing  to  interconnections  in  the  distribution  net  work  of 
the  direct  current  distribution  system,  this  investigation  was  con- 


82, 082, 058 
417,628 


87 


fined  to  the  60  cycle  distribution  system  where  such  interconnec- 
tions did  not  exist  or  could  readily  be  disconnected.  This  study 
was  confined  to  certain  groups  of  residence  lighting,  commercial 
lighting,  general  power,  and  large  users  and  is  presented  below. 

, DIVERSITY > 


Residence 

Commercial 

General 

Large 

Light. 

Light. 

Power. 

Users. 

Between  consumers  

3.35 

1.46 

1.44 

Between  transformers  

1.3 

1.3 

1.35 

1.15 

Between  feeders  

1.15 

1.15 

1.15 

1.15 

Between  sub-stations  

1.1 

1.1 

1.1 

1.1 

Consumer  to  transformer.  . . 

3.35 

1.46 

1.44 

Consumer  to  feeder 

4.36 

1.90 

1.95 

1.15 

Consumer  to  sub-station 

5.02 

2.19 

2.24 

1.32 

Consumer  to  generator. ; . . . . 

5.52 

2.41 

2.46 

1.45 

In  these  figures  no  account  is  taken  of  the  efficiency  of  the 
different  portions  of  the  system,  for  which  allowance  must  be 
made  in  their  application  to  determine  investment.  It  will  be 
noted  that  diversity  exists  between  all  portions  of  the  system,  not 
only  between  consumers  on  the  same  transformer,  but  between 
transformers  on  the  same  feeder,  between  the  different  feeders 
from  any  substation  and  between  substations  themselves. 

Except  in  the  case  of  residence  consumers  no  more  recent 
figures  are  available.  Data  obtained  in  December  1912  in  the  case 
of  one  large  group  of  residence  customers  shows  that  the  diversity 
factor  between  consumers  has  decreased  from  3.42  to  2.85  which 
might  be  explained  by  the  average  increased  use  of  electricity. 
It  is  probable  that  the  diversity  is  somewhat  smaller  in  the  direct 
current  district  on  account  of  being  more  closely  built  up,  requir- 
ing greater  hours  use  of  current  for  lighting.  It  is  not  considered 
that  sufficient  data  is  at  hand  to  determine  with  great  accuracy 
the  investment  for  these  different  classes  of  service,  but  calcula- 
tions based  on  these  figures  have  been  made  as  showing  approxi- 
mately the  present  conditions. 

It  has  been  found  that  the  month  of  October  represents  very 
closely  the  yearly  average  for  consumption  of  electricity,  and  ac- 
cordingly the  following  summary  of  lighting  and  power  statistics 
by  rate  schedule  has  been  obtained  for  October  1911. 


88 


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TABLE  NO.  17. 

EXPENSE  OF  FURNISHING  ALL  BUSINESS  EXCEPT  RAILWAY  AND  BULK  SUPPLY  FOR  THE  CALENDAR  YEAR  1911 

(EXCLUSIVE  OF  DEPRECIATION.) 


89 


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NEW  BUSINESS— 

Contract  Department  Expense $ 200,642  . 4.07  . 073691  .101897 

Advertising  226,550  . 4.60  . 083093  .115065 

Wiring  and  Appliances 20,790.  .42  .007625  .010568 


90 


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5,922.  100.00  1.806717  2.501659 


91 


Table  No.  17  shows  the  expense  of  furnishing  all  business  ex- 
cept railway  and  bulk  supply  for  the  year  1911  on  the  basis  of  the 
revised  figures  used  in  this  report. 

WHOLESALE  LIGHT  AND  POWER. 

In  addition  to  railway  and  bulk  supply  customers  the  Com- 
pany supplies  wholesale  customers  under  the  terms  of  schedule 
C of  printed  schedule  of  rates  filed  with  the  City.  Under  this 
form  of  contract  current  is  furnished  for  both  power  and  lighting 
for  five  year  periods  on  the  basis  of  a primary  charge  per  kilowatt 
of  maximum  demand  plus  a secondary  charge  per  kilowatt  hour 
of  current  consumption.  In  both  cases  the  unit  rates  are  gradu- 
ated downward  depending  respectively  on  the  amount  of  maximum 
demand  and  kilowatt  hour  consumption.  This  form  of  contract 
is  available  for  the  following  three  classes  of  service:  direct  cur- 
rent, alternating  current  transformed,  and  alternating  current  un- 
transformed. In  all  of  the  above  cases  slightly  lower  primary  rates 
are  available  where  the  maximum  demand  is  not  less  than  a cer- 
tain guaranteed  amount  and  a still  lower  primary  charge  where 
with  a guaranteed  maximum  the  Company  does  not  stand  ready  to 
furnish  service  between  the  hours  of  4 and  8 P.  M.  from  November 
to  February,  both  inclusive,  which  constitutes  the  peak  load  period. 

Computations  based  on  diversity  factors  set  forth  on  page  88 
show  that  the  average  net  return  on  the  investment  for  the  various 
classes  of  this  business  for  the  year  1911  is  in  some  cases  above 
7 per  cent  and  in  other  cases  somewhat  below  that  figure,  the  aver- 
age being  but  slightly  less  than  7 per  cent. 

In  all  cases  a proper  proportion  of  indirect  or  general  expense 
has  been  charged  in  estimating  the  operating  costs.  It  is  not 
considered  that  these  contracts  shift  an  unfair  burden  on  the 
consumer  paying  the  maximum  rate,  since  they  bear  a substantial 
portion  of  the  general  expense  of  the  company  as  a whole  and 
increase  the  load  factor.  Higher  rates  would  result  in  a loss  of 
business  and  consequently  make  other  classes  of  business  bear  all 
expense. 


SPECIAL  RATE  SCHEDULES. 

A study  has  been  made  by  the  various  special  rates  schedules 
used  by  the  Company,  with  a view  of  determining  if  any  of  these 
rates  are  prejudicial  to  the  interest  of  customers  paying  the  maxi- 
mum rates  or  if  any  of  these  schedules  result  in  unjust  discrimina- 
tion. Under  the  latter  it  is  desired  to  call  attention  to  the  following : 

Under  contract  form  A-3,  discount  is  given  owners  of  aoart- 
ment  buildings  on  bills  for  electricity  used  for  power  and  for 
lighting  halls  and  other  public  portions  of  the  building,  in  the  event 
that  electricity  is  also  used  by  the  tenants  of  the  individual  apart- 
ments. This  discount  varies  with  the  number  of  apartments 
furnished  with  electric  service,  but  the  minimum  rate  under  this 
contract  is  5 cents  per  K.  W.  H.  for  all  current  consumed. 

The  Company  also  has  a special  contract  for  consumers  using 


92 


electricity  for  lighting  at  more  than  one  premises  under  which 
a discount  is  given,  dependent  on  the  number  of  premises  so 
served  but  not  exceeding  20  per  cent. 

Special  rebates  are  given  charitable  or  semi-charitable  insti- 
tutions which  do  not  apply  to  general  consumers  with  like  in- 
stallations. 

Special  discounts  are  allowed  in  the  case  of  drug  stores  which 
distribute  advertising  literature,  etc.  While  such  service  may  be 
of  value  to  the  Company  its  benefit  does  not  necessarily  bear 
any  relation  to  the  amount  of  electricity  consumed,  so  that  this 
service  should  be  on  an  entirely  separate  and  distinct  basis  from 
the  electric  service.  The  reasons  for  the  above  discounts  were 
doubtless  to  secure  business  in  prior  years  when  electric  service 
was  not  recognized  as  a practical  necessity.  In  addition  to  leading 
to  unjust  discrimination,  the  necessity  for  such  inducements  to 
secure  business  does  not  seem  apparent  at  the  present  time. 

Company  employes  are  furnished  with  electric  service  at 
lower  rates  than  the  general  public. 

All  of  the  above  classes  of  contracts  and  concessions  appear 
unjustly  discriminatory,  and  it  is  accordingly  recommended  that 
they  be  abolished.  The  elimination  of  these  contracts  as  they 
mature  will  result  in  increased  revenue  to  the  Company. 


MUNICIPAL  STREET  LIGHTING. 


The  Commonwealth  Edison  Company  furnishes  street  light- 
ing for  the  City  in  scattered  locations  mostly  south  of  55th  street, 
which  are  not  within  the  reach  of  the  City’s  substations.  The 
lamps  are  nearly  all  of  the  old  direct  current  open  arc  type  now 
practically  obsolete.  On  account  of  the  large  territory  covered 
with  few  lamps  (an  average  of  897  for  1911)  the  investment  in 
circuits  and  operating  expenses  are  abnormally  high.  The  service 
is  supplied  from  the  substation  at  56th  and  Wallace  Street.  The 
investment,  annual  depreciation  allowance  and  operating  expense 
per  500  Watt  direct  current  lamp  for  the  year  1911  are  as  follows: 


Present  Value 

of  Investment  Depreciation. 

Lamp  and  distributing  circuit $ 71.51  $4.59 

Sub-station  building,  land  and 

equipment  38.04  1.66 

Transmission  line  and  conduit.  ...  . . 16.45  .40 

Generating  station  75.57  2.67 

Miscellaneous 4.04  .09 


$205.61  $9.41 

Working  capital  12.67 

Total $218.28 


Operation. 

$27.47 

6.82 

.11 

12.01 

.64 


$47.05 


TOTAL  EXPENSE  PER  LAMP. 


Operation  $47.05 

Depreciation 9.41 

Taxes  and  insurance 3.37 

Municipal  compensation  2.25 


General  and  miscellaneous  expense 


3.90 


Total  $65.98 

Net  income  9.02=4.13%  on  investment. 

Gross  income  $75.00 


The  investment  per  lamp  cannot  be  fairly  compared  with 
that  of  the  City’s  street  lighting  plant,  as  nearly  all  of  the  City’s 
lamps  and  substation  equipment  are  of  a more  modern  type.  A 
comparison  of  operating  costs  of  the  old  type  of  lamp  shows  an 
annual  cost  of  $47.05  for  the  Company  as  against  $48.42  for  the 
City;  the  difference  being  due  to  cheaper  power  and  lower  sub- 
station operating  cost  obtained  under  the  contract  with  the 
Sanitary  District.  The  City’s  present  contract  with  the  Sanitary 
District  at  $1.00  per  lamp  per  year  for  substation  operation  and 
maintenance  is  a loss  to  the  Sanitary  District  as  far  as  the  opera- 
tion of  the  old  direct  current  lamps  is  concerned.  The  Company 
is  about  to  rehabilitate  their  street  arc  lighting  system,  installing 
the  alternating  current  flame  arc  lamp;  similar  to  the  new  type 
now  used  by  the  City,  which  will  result  in  improved  service  at  a 
somewhat  lower  operating  cost. 

FUTURE  STREET  LIGHTING. 

When  the  present  contract  for  10,000  new  lamps  with  the 
Sanitary  District  is  completed  within  the  next  year,  there  will 
be  approximately  the  equivalent  of  28,000  arc  lamps  in  service 
maintained  by  the  City,  consisting  of  14,500  flaming  arc  lamps, 
7,000  four  ampere  series  tungsten  lamps  (equivalent  to  1,500  arcs) 
and  7,000  seven  ampere  alternating  current  arc  lamps.  The  capacity 
of  the  Sanitary  District  plant  under  the  present  restrictions  on 
water  supply,  is  only  approximately  27,000  arc  lamps  or  4,000 
in  addition  to  the  present  contract.  It  is  evident  that  the  City  will, 
in  the  near  future,  be  compelled  to  procure  additional  power  for 
street  lighting  if  the  system  is  to  be  extended,  and  unless  addi- 
tional water  supply  is  obtained  by  the  Sanitary  District,  other 
sources  must  be  resorted  to.  From  an  analysis  of  the  cost  of  the 
railway  and  bulk  supply  business  of  the  Commonwealth  Edison 
Company,  it  is  evident  that  they  could  furnish  power  to  the  City 
on  a similar  basis  at  a rate  which  would  be  the  equivalent  of  not 
over  .7  cent  per  kilowatt  hour  under  the  usual  operating  con- 
ditions. The  present  supply  furnished  by  the  Sanitary  District 
figures  about  .5c  per  kilowatt  hour.  There  would  also  be  an  ad- 
vantage in  having  a source  of  supply  separate  from  the  Sanitary 
District  hydroelectric  plant  to  insure  continuity  of  service.  These 
points  are  introduced  here,  as  the  question  of  power  for  street 
lighting  is  a problem  which  must  be  settled  in  the  near  future. 

MUNICIPAL  INCANDESCENT  LIGHTING. 

Incandescent  lighting  service  is  furnished  the  City  of  Chicago 
by  the  Commonwealth  Edison  Company  at  about  430  locations 
consisting  of  school  buildings,  pumping  stations,  small  parks,  po- 


94 


lice  stations,  fire  stations,  municipal  courts,  branch  public  libraries, 
engineering,  bridge,  street  and  electrical  department  offices,  shops 
and  store  rooms,  etc.  This  service  is  furnished  at  a flat  rate  of 
3.5  cents  per  kilowatt  hour.  While  sufficient  time  has  not  been 
available  to  make  a detailed  study  of  the  cost  of  furnishing  this 
service,  it  is  believed  that  this  business  does  not  earn  an  income 
on  the  necessary  investment  equal  to  that  of  the  Company’s  gen- 
eral business.  A comparison  with  rates  to  other  municipalities 
shows  the  3.5  cent  rate  to  be  below  the  average.  It  is  planned 
to  make  a report  on  the  cost  of  municipal  lighting  and  power 
at  a later  date. 

LIGHTING  RATES  VS.  POWER  RATES. 

From  a consideration  of  diversity  factors  as  shown  on 
page  88  it  is  readily  seen  that  the  investment  per  kilowatt  of 
maximum  demand  required  for  retail  lighting  is  less  than  for 
general  power;  on  the  other  hand  the  cost  of  renewal  of  incan- 
descent lamps  and  greater  proportionate  general  expenses  of  the 
smaller  lighting  installations  tend  to  equalize  the  cost  of  the  two 
classes  of  business.  In  alternating  current  systems  power  supply 
requires  even  a greater  proportionate  investment  than  lighting. 
It  has  been  customary  in  the  past  for  central  station  companies 
to  establish  rates  for  small  power  installations  considerably 
cheaper  than  for  lighting.  This,  for  the  reason  that  such  a load 
was  deemed  very  desirable  because  it  employed  apparatus  that 
would  otherwise  be  idle  during  the  day,  as  the  lighting  and  power 
loads  overlapped  but  slightly.  In  order  to  secure  this  business 
inducements  were  made  in  rates  which  were  about  half  of  the 
corresponding  lighting  rate.  The  more  general  use  of  electricity 
for  purposes  other  than  lighting,  the  wider  field  of  the  power 
business,  together  with  the  greater  number  of  hours  of  artificial 
light  required  in  closely  built  cities,  have  reduced -the  marked 
differences  in  conditions  whereby  large  variations  in  rates  between 
commercial  power  and  lighting  were  warranted. 

In  view  of  these  facts,  it  is  logical  that  for  small  power  in- 
stallations the  maximum  power  rate  should  not  be  lower  than 
the  maximum  lighting  rate.  An  equalization  of  the  two  rates 
would  also  have  the  advantage  that  in  many  cases  the  installation 
of  separate  watt  meters  as  well  as  maximum  demand  meters  for 
power  and  light  could  be  avoided  with  a consequent  reduction 
in  investment.  Meter  reading  and  maintenance,  billing  and  col- 
lecting expense  would  also  be  reduced. 

A study  of  the  comparative  costs  of  serving  the  average 
retail  lighting  customer  and  average  retail  power  customer,  dis- 
cussed on  pages  103  and  106  and  graphically  illustrated  in  Diagram 
No.  22  shows  that  the  expense  of  furnishing  the  power  service  is 
but  slightly  lower. 

RATES  IN  OTHER  CITIES. 

While  the  reasonableness  of  the  rates  of  the  Comonwealth 
Edison  Company  are  not  determined  by  comparison  with  rates 
elsewhere  such  a comparison  is  not  without  interest. 


t 


TABLE  NO.  18. 

MAXIMUM  ELECTRIC  RATES  LIGHT  AND  POWER,  MAY,  1912 


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* In  1911  the  rate  was  15c  net.  t In  1911  the  rate  was  He  net. 

f*  July  1,  1912,  maximum  rate  was  reduced  to  11c  per  K.  W.  H.  § In  1911  the  rate  was  12%c. 

f*  In  1912  the  rate  was  reduced  to  10c  gross.  f In  1911  this  rate  was  15c  net. 

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T?»T£.  f*t£.r?  /TWH  //Y  C S.NTS 


96 


Table  18  indicates  in  a general  way  the  maximum  retail  light- 
ing and  power  schedules  in  effect  in  forty-one  of  the  large  cities  in 
the  United  States  during  May,  1912.  True  comparisons  between 
rates  cannot  be  made  from  this  table,  however,  owing  to  the 
fact  that  different  methods  of  charging  are  employed.  In  order 
to  arrive  at  a correct  comparison,  actual  monthly  meter  read- 
ings for  a twelve  months’  period  were  selected  from  what 
may  be  called  representative  average  installations  of  one  customer 
from  each  of  several  classes  of  customers  of  the  Commonwealth 
Edison  Company  and  sent  to  the  electric  lighting  companies  in 
forty-three  of  the  large  cities  in  the  United  States  and  Canada,  with 
the  request  that  their  billing  department  compute  the  bills  as 
if  they  were  their  own  customers,  on  the  rate  schedule  in  force 
during  1911.  The  figures  submitted  in  each  case  have  been  re- 
duced to  a rate  per  kilowatt  hour  basis  and  are  shown  by  Diagram 
No.  18  and  Table  No.  20,  which  give  the  maximum,  average  and 
minimum  for  the  forty-three  cities  and  also  the  corresponding 
rates  of  the  Commonwealth  Edison  Company  at  various  dates. 
It  will  be  seen  that  for  nearly  every  class  of  customer,  the  Com- 
monwealth Edison  rates  compare  favorably  with  the  average  of 
other  large  cities. 

This  data  has  been  presented  in  part  by  the  Company  in  pre- 
liminary discussions  before  the  Committee. 


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DIAGRAM  NO.  18. — LIGHTING  RATES  FOR  CERTAIN  CHICAGO  INSTALLA- 
TIONS COMPARED  WITH  RATES  IN  OTHER  CITIES. 


\ 


NOTE— Below  comparison  made  up  from  various  published  statements,  supplemented  by  statistical  data  received  from  companies  and  applied  thereto. 


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DIAGRAM  NO.  19. — GRAPHIC  ILLUSTRATION  OF  TABLE  NO.  19. 


Table  No.  19  and  Diagram  No.  19  show  comparisons  between 
published  statements  of  several  of  the  largest  electric  companies, 
which  operate  on  a generally  similar  basis.  The  figures  were  ob- 
tained from  published  statements  supplemented  by  data  furnished 
by  the  companies. 


99 


TABLE  NO.  20. 


COMPARATIVE  RATES  FOR  LIGHTING  IN  FORTY-THREE  OF  THE  LARGEST  CITIES  OF 
THE  UNITED  STATES  AND  CANADA  FOR  1911. 


, — -On 

Basis  of — 

K.W. 

K.W.H. 

t 

-Cost  in 

Cents  Per  K.W.H.- 

\ 

Con- 

Con  sump- 

- Maxi- 

Aver- 

Mini- 

Chicago Chicago 

nected. 

tion. 

mum. 

age. 

mum. 

1911. 

1913. 

Ten-room  dwelling  . . . 

. . 2.30 

625 

12.63 

9.39 

4.43 

8.87 

7.82 

Six-room  apartment  . . 

. . .45 

192 

14.05 

9.96 

5.18 

8.77 

7.76 

Office 

. . 2.05 

787 

12.32 

9.68 

6.11 

9.52 

8.52 

All-night  lunch  room. 

. . .80 

2299 

10.00 

6.51 

3.40 

6.52 

5.53 

Drug  store  . . . . 

. . .70 

3139 

10.00 

6.34 

2.97 

6.32 

5.33 

Retail  store  

. . 3.30 

1520 

12.00 

9.22 

5.00 

8.07 

7.09 

Saloon 

. . 4.10 

6342 

10.00 

6.88 

3.66 

6.62 

5.62 

Printing  shop  lighting. 

..  1.90 

1278 

12.00 

8.87 

4.98 

7.92 

6.94 

Manufacturing  lighting 

. . 4.50 

2757 

12.00 

8.48 

4.90 

7.58 

6.58 

COMPARATIVE  RATES  FOR  RETAIL  POWER  IN 

FORTY- 

THREE  OF  THE  LARGEST  CITIES 

OF  THE  UNITED  STATES  AND  CANADA  FOR 

1911. 

r On  Basis  of \ 

K.W. 

K.W.H. 

r~ 

—Cost  in 

Cents  Pei 

' K.W.H. 

\ 

Con- 

Consump- 

Maxi- 

Aver- 

Mini- 

Chicago 

nected. 

tion. 

mum. 

age. 

mum. 

1911-1913. 

Printing  shop  

1.1 

755 

11.12 

7.26 

3.80 

6.97 

Manufacturing 

. 7.5 

12589 

7.32 

4.43 

2.06 

4.44 

HISTORY  OF  THE  COMPANY’S  MAXIMUM  RATES. 

Lighting : The  retail  lighting  rate  of  the  Chicago  Edison 
Company  prior  to  1898  was  1 cent  per  16  C.  P.  lamp  hour  or  20 
cents  per  kilowatt  hour,  less  21/2  per  cent,  discount  for  prompt  pay- 
ment. 

In  1898  the  method  of  charging  was  changed  from  the 
straight  kilowatt  hour  basis  to  the  Wright  Demand  System,  which 
is  the  present  method  of  charging,  the  rate  at  that  time  being 
20  cents  net  for  the  first  45  hours’  use  per  month  of  the  maximum 
demand  in  winter  months  or  15  hours  use  in  summer  months,  p 
10  cents  per  kilowatt  hour  consumption  in  excess.  The  secondary 
rate  was  allowed  only  in  case  of  payment  in  ten  days,  otherwise 
the  bill  was  rendered  at  the  full  primary  rate.  The  minimum 
monthly  bill  was  $1.00. 

In  March  1903  the  full  rate  charge  for  lighting  was  changed 
to  30  hours  use  of  the  maximum  demand  for  both  summer  and 
winter  months. 

The  43rd  General  Assembly  of  the  State  of  Illinois  passed 
an  act  entitled  “An  Act  to  confer  upon  the  City  of  Chicago  the 
power  and  authority  to  sell  surplus  electricity  and  to  fix  the 
rates  and  charges  for  the  supply  of  gas  and  electricity  for  pov 
heating,  and  lighting,  furnished  by  any  individual,  company  or  cor- 
poration to  said  City  of  Chicago  and  the  inhabitants  thereof,” 
which  was  approved  on  May  18th,  1905. 

On  July  1st,  1905,  the  Chicago  Edison  Company  made  a vol- 
untary reduction  in  rates  to  16  cents  primary  and  10  cents  second- 
ary, net  for  prompt  payment.  The  gross  rate  was  1 cent  per 
kilowatt  hour  greater  for  both  primary  and  secondary. 


. 


100 


In  the  Act  above  mentioned  it  was  provided  that  the  same 
should  not  be  in  force  until  the  question  of  its  adoption  had  been 
approved  by  popular  vote,  which  was  done  on  Nov.  7th,  1905.  On 
Dec.  4th,  1905,  the  City  Council  passed  an  order  providing  for  an 
investigation  and  report  on  reasonable  rates  for  the  supply  of 
gas  and  electricity.  This  report  was  presented  March  26th,  1906 
by  B.  J.  Arnold  and  William  Carroll,  City  Electrician.  The  con- 
clusions of  this  report  were  that  the  Edison  and  Commonwealth 
Companies  could  afford  to  reduce  their  lighting  rates.  At  the 
same  time  this  report  was  presented  to  the  Council,  the  Common- 
wealth and  Edison  Companies  submitted  a proposition  that  if  they 
were  allowed  to  consolidate  under  the  Commonwealth  franchise 
they  would  reduce  the  price  of  street  lighting  from  $103  to  $75 
per  lamp  and  reduce  the  maximum  lighting  rate  to  14  cents  primary 
and  9 cents  secondary  net  for  a period  of  two  years  and  to  12 
cents  and  8 cents  net  for  the  following  three  years.  The  report 
by  Messrs.  Arnold  and  Carroll  considered  that  these  figures  would 
be  reasonable  and  fair.  This  proposition  on  the  part  of  the  Com- 
pany also  contained  conditions  of  minor  importance. 

An  ordinance  embodying  these  provisions  in  regard  to  rates 
was  passed  June  11th,  1906,  by  the  City  Council  and  vetoed  by 
Mayor  Dunne  on  June  18th,  the  reason  being  that  he  did  not  con- 
sider the  companies  obliged  to  consolidate  under  the  ordinance 
and  that  if  they  did  not  do  so  the  3 per  cent,  compensation  which 
the  City  would  receive  on  the  gross  earnings  of  the  Commonwealth 
Company  would  not  include  the  Edison  Company,  and  also  that 
he  considered  the  proposed  rates  too  high.  The  ordinance  was 
not  passed  over  veto. 

On  July  1st,  1906,  the  Company  reduced  the  rates  to  14  cents 
primary  and  9 cents  secondary  net,  and  abolished  the  minimum 
monthly  bill  of  $1.00.  On  August  1st,  1907,  another  reduction  was 
made  to  14  cents  primary  and  8 cents  secondary  net.  In  Septem- 
ber, 1907,  the  Companies  consolidated  under  the  name  of  the  Com- 
monwealth Edison  Company  without  the  sanction  of  the  City 
Council.  On  March  23rd,  1908,  an  ordinance  was  passed  by 
the  City  Council  recognizing  the  consolidation  of  the  com- 
panies under  the  Commonwealth  Electric  Company's  franchise, 
which  specifically  terminated  the  ordinances  of  the  previous- 
ly acquired  competing  companies  and  cancelled  whatever  right  the 
Company  might  have  had  to  operate  commercial  telephone  service 
under  the  Commonwealth  franchise.  It  also  provided  that  3 per 
cent,  of  the  gross  earnings  be  paid  the  City  annually  as  compen- 
sation and  specified  a rate  of  $75  per  annum  for  street  arc  lamps. 
The  ordinance  further  provided  for  a maximum  net  rate  for  retail 
lighting  of  14  cents  primary  and  8 cents  secondary  to  August  1st, 
1908 ; 12  cents  primary  and  7 cents  secondary  from  August  1st, 
1908  to  August  1st,  1909;  and  12  cents  primary  and  6 cents 
secondary  from  August  1st,  1909  to  July  31st,  1912.  This  ordi- 
nance also  provided  that  the  Company  permit  the  examination  of 
its  books  and  accounts  not  oftener  than  once  each  year  by  experts 


0 


* 


I 


101 


selected  by  the  City  of  Chicago  and  approved  by  the  Company  for 
the  purpose  of  regulating  the  maximum  rates. 

While  the  Company  was  not  compelled  to  make  any  changes 
in  this  latter  rate  for  a period  of  three  years,  on  May  1st,  1911, 


DIAGRAM  NO.  20. — EFFECT  OF  PAST  RATE  REDUCTIONS  ON 
CERTAIN  INSTALLATIONS. 


102 


a voluntary  reduction  was  made  to  11  cents  primary  and  6 cents 
secondary;  on  April  1st,  1912,  a reduction  to  10  cents  primary 
and  6 cents  secondary;  and  on  October  1st,  1912  the  final  voluntary 
reduction  to  10  cents  primary  and  5 cents  secondary  net. 

During  the  existence  of  the  Commonwealth  Electric  Company 
its  maximum  rates  were  identical  with  those  of  the  Chicago  Edison 
Company. 

Diagram  No.  20  shows  the  effect  of  these  rate  changes  on 
certain  actual  representative  installations  before  referred  to.  It 
is  of  interest  in  this  connection  to  note  the  effect  of  rate  reduc- 
tion, together  with  improvements  made  in  the  incandescent  lamp, 
on  the  amount  of  light,  expressed  in  candle  hours,  which  one  dollar 
would  purchase  at  various  times  since  the  beginning  of  the  electric 
lighting  industry  in  Chicago.  This  is  illustrated  by  Diagram  No. 
21,  which  shows  that  the  consumer  receives  about  91/2  times  as 
much  light  for  the  same  money  now  as  he  did  fifteen  years  ago. 

Power : Previous  to  1900  the  maximum  power  rate  was  10 
cents  per  kilowatt  hour.  In  1900  the  net  rate  was  changed  to  10 
cents  per  kilowatt  hour  for  the  first  hour’s  daily  use  of  the  maxi- 
mum demand,  8 cents  for  the  second  hour,  6 cents  for  the  third, 
4 cents  for  the  fourth  and  3 cents  for  all  current  consumed  above 
eight  hours  daily  use  of  the  maximum  demand  in  any  month,  with 
a minimum  bill  of  $1.00  per  month  per  connected  horse  power. 
On  February  1st,  1907  the  present  rate  was  established  of  10  cents 
net  per  kilowatt  hour  for  the  first  hour’s  daily  use  of  the  maximum 
demand,  5 cents  for  the  second  and  3 cents  for  all  over  2 hours 
daily  use  of  the  maximum  demand  in  any  month  with  a sliding- 
scale  of  discounts  on  the  5 cent  and  3 cent  portions,  when  same 
equal  or  exceed  $50.00.  The  minimum  bill  was  also  reduced  to  50 
cents  per  month  per  connected  horse  power. 

RETAIL  LIGHTING. 

From  table  No.  16  it  is  computed  that  the  average  retail  light- 
ing installation,  including  metered  tungstens  and  signs,  imposes 
a maximum  demand  of  .653  kilowatts  upon  the  system,  the  average 
use  of  which  is  2.6  hrs.  per  day,  while  the  equivalent  connected 
load  is  .97  kilowatts  or  about  191/2  16-cp.  50  watt  lamps.  The  yearly 
maximum  demand  is  somewhat  in  excess  of  the  average  of  the 
monthly  maximums,  thus  the  former  is  increased  to  .683  kilowatts 
for  the  average  installation  under  consideration.  Of  the  total 
number  of  retail  metered  lighting  customers,  approximately  71 
per  cent,  are  residences,  27.5  per  cent,  commercial  and  1.5  per  cent, 
metered  signs.  In  arriving  at  the  investment  required  to  furnish 
this  service,  recourse  must  be  had  to  diversity  factors  on  page  88 
before  the  unit  costs  of  any  portion  of  the  system  can  be  applied 
to  the  case  at  hand.  The  factors  used  in  the  following  computation 
were  3.5  as  representing  diversity  from  the  average  consumer 
to  substation  in  the  case  of  the  alternating  current  distributing 
system  and  3.2  for  the  direct  current  system.  In  calculating  the 
unit  costs  of  supply  for  various  hours  use  of  the  maximum  de- 
mand, allowance  must  be  made  for  the  variation  of  diversity 


103 


DIAGRAM  NO.  21. — BENEFITS  TO  USERS  OF  ELECTRICITY  RESULTING 
FROM  INCREASED  LAMP  EFFICIENCY  AND  RATE  REDUCTIONS. 

factors,  since  with  24  hours  use,  the  factors  would  be  reduced 
to  unity  in  all  cases. 

With  an  allowance  of  7 per  cent,  return  on  the  investment,  cal- 
culations have  been  made  showing  the  cost  per  kilowatt  hour  of 
furnishing  alternating  as  well  as  direct  current  service  to  the  aver- 
age retail  metered  lighting  customer,  for  varying  hours  daily  use  of 
the  maximum  demand.  This  data,  together  with  the  revenue  derived 


14 

13 

12 

II 

10 

9 

8 

7 

6 

5 

4 

3 

2 

I 


CENTS  PER  KILOWATT  HOUR 


104 


5°/c 

I 


lOje 

I 


1 5 ’A 


HOURS  USE  PER 


LOAD  FACTOR 
DAV  OF  MAXIMUM 


3|0% 


3p 


*4-0'/. 


DEMAND 


8 


lO 


lGRAM  NO.  22. — REVENUE  AND  COST  OF  SERVICE  FOR  AVERAGE  RE- 
TAIL LIGHT  AND  POWER  CUSTOMERS. 


rr 


105 


from  this  business,  is  shown  in  diagram  No.  22.  While  it  is  not 
maintained  that  the  results  so  obtained  are  more  than  approximate, 
on  account  of  the  meager  data  available,  it  is  believed  that  they 
are  of  value  as  indicating  as  accurately  as  can  be  computed  at 
the  present  time,  the  relations  of  cost  and  revenue. 

It  will  be  observed  that  the  direct  current  service  is  more 
costly  than  the  alternating  current  service,  on  account  of  greater 
investment  and  operating  costs  due  principally  to  conversion. 
For  either  class  of  service  the  present  rate  of  ten  cents  per  kilo- 
watt hour  for  the  first  hour’s  daily  use  of  the  maximum  demand, 
and  five  cents  for  the  excess  use,  is  greater  than  the  cost,  includ- 
ing an  allowance  of  7 per  cent,  on  the  investment,  when  the  maxi- 
mum demand  is  used  longer  than  about  1%  hours  per  day.  It  is 
also  evident  that  when  the  maximum  is  used  less  than  about  V/% 
hours  per  day  as  an  average,  the  company  fails  to  realize  7 per  cent, 
on  the  required  investment.  Table  No.  16  shows  that  about  one- 
third  of  all  retail  lighting  customers  make  use  of  their  maximum 
not  to  exceed  one  hour  per  day,  indicating  that  a large  proportion 
are  not  profitable  to  the  company  when  considered  from  their  in- 
dividual standpoint ; yet  if  they  did  not  employ  the  service,  the  cost 
of  supply  to  those  remaining  would  be  increased. 

RETAIL  POWER. 

Table  No.  16  indicates  that  the  average  retail  power  installa- 
tion imposes  upon  the  system  a maximum  demand  of  2.08  kilo- 
watts, the  average  use  of  which  is  two  hours  per  day.  The  aver- 
age retail  installation  is  regarded  as  the  average  of  all  power 
users  on  the  regular  schedule  (10  cents  for  the  first  hours  daily 
use  of  the  maximum  demand,  5 cents  for  the  second  and  3 cents 
for  all  excess) , the  secondary  portions  of  whose  bills  do  not  ex- 
ceed $45.00  per  month,  and,  consequently,  are  not  entitled  to 
quantity  discount  under  the  company’s  present  schedule. 

From  the  table  of  diversity  factors  given  on  page  88  calcu- 
lations have  been  made  showing  the  cost  of  furnishing  this  ser- 
vice, which  is  shown  in  Diagram  No.  22.  It  is  seen  from  this 
diagram  that  the  cost  of  power  service  is  practically  the  same 
as  for  alternating  current  lighting,  for  the  average  hours  daily 
use  of  the  maximum  demand,  being  below  the  lighting  cost  for 
greater  use  and  above  it  for  less  use.  Although  the  cost  of  direct 
current  lighting  service  is  higher  than  alternating  current,  as  pre- 
viously discussed,  the  cost  of  both  classes  of  power  service  is 
practically  the  same  on  account  of  the  use  of  the  same  diversity 
factors  for  both  alternating  current  and  direct  current  power. 
The  ordinary  alternating  current  power  supply  requires  relative- 
ly greater  capacity  in  generating  and  distributing  systems  than 
direct  current  supply. 

It  is  of  interest  to  note  that  the  average  hours  use  of  the  maxi- 
mum demand  is  greater  in  the  case  of  retail  lighting  than  retail 
power. 


10G 


ESTIMATE  OF  PAST  EARNINGS  OF  THE  COMMONWEALTH-EDISON  CO. 

While  it  was  not  possible  to  audit  the  Company’s  books  in  de- 
tail from  the  date  of  the  consolidation  in  1907  to  1913,  as  was  done 
for  the  year  1911,  certain  adjustments  were  made  where  the  1911 
audit  developed  the  necessity  of  correcting  the  Company’s  figures 
to  our  standards  for  rate  purposes. 

Overhead  charges  were  revised  on  the  same  basis  as  for  the 
year  1911,  and  depreciation  similarly  treated.  The  results  are 
shown  in  Diagram  No.  23,  from  which  it  is  evident  that  the  re- 
ductions in  retail  lighting  rates,  as  well  as  general  reductions 
in  rates,  have  not  impaired  the  return  on  investment.  On  the 
contrary,  the  surplus  above  a 7 per  cent,  return  on  investment 
has  been  largely  increased.  It  is  also  seen  that  still  further  reduc- 
tions in  rates  effective  in  1911  and  1912  would  have  been  possible 
without  reducing  the  net  revenue  below  a reasonable  and  fair 
amount. 

It  will  be  observed  that  a deficit  is  shown  for  the  fiscal  year 
ending  September  30th,  1908.  Reference  to  Diagram  No.  11  indi- 
cates that  the  rate  of  return  for  1908,  as  shown  by  the  Company’s 
records,  was  lower  than  for  any  year  since  1901.  This  is  partly  due 
to  the  increase  in  capital  account  caused  by  the  appraisal,  and  part- 
ly to  a less  proportionate  increase  in  revenue  for  that  year.  The 
Company’s  records  do  not  show  a deficit  for  this  period,  because  the 
amount  charged  off  for  depreciation  was  comparatively  small. 

If  the  present  retail  lighting  rates  had  been  in  effect  in  1911, 
the  revenue  would  have  been  decreased  approximately  $755,000.00, 
and  only  about  $377,000.00  in  1912,  as  the  present  rates  were 
effective  October  1st,  1912.  In  addition  to  the  above,  further  re- 
ductions amounting  to  $228,000.00  in  1911,  and  $636,000.00  in 
1912,  could  have  been  made  without  impairing  the  7 per  cent 
return  on  the  revised  investment. 

These  estimates  make  no  allowance  for  the  increased  business 
which  results  from  a reduction  in  rates. 

As  previously  discussed,  equalization  of  the  retail  lighting 
and  power  rates  is  logical,  and  is  advantageous  to  the  consumer 
as  his  lighting  bills  are  reduced.  While  the  Company  temporarily 
suffers  a reduced  revenue  it  benefits  by  a reduction  in  investment 
and  operating  expense;  the  percentage  of  decrease  in  cost  being 
greater  in  the  case  of  the  small  consumer  who  uses  both  light 
and  power.  Statistics  show  increased  use  of  electricity  with  lower 
rates,  so  that  a reduction  in  rates  does  not  result  in  a correspond- 
ing reduction  in  income.  For  these  reasons,  and  as  a result  of 
the  elimination  of  certain  unjustly  discriminatory  contracts  dis- 
cussed on  page  92,  it  can  be  stated  that  a reduction  amounting  to 
more  than  the  above  mentioned  figure  of  $636,000.00  can  be  made 
on  the  basis  of  the  1912  business,  for  future  years.  If  the  light- 
ing rate  had  been  10,  5 and  3 cents  during  the  year  1912,  the 
revenue  would  have  been  decreased  approximately  $365,000.00  in 
addition  to  the  $377,000.00  above  mentioned. 


' 


107 


DIAGRAM  NO.  23. — ILLUSTRATING  INCREASE  IN  RATE  OF  RETURN  AND 
SURPLUS  WITH  DECREASING  RATES. 

FUTURE  RATE  REDUCTIONS. 

Before  attempting  to  estimate  what  may  reasonably  be  ex- 
pected in  the  way  of  future  rate  reductions,  it  is  necessary  to  be 
familiar  with  not  only  the  present  conditions,  but  also  with  the 
factors  which  have  in  the  past  contributed  to  reductions  in  the 
cost  of  electricity  supply.  One  of  the  most  important  factors  con- 


'i 


n 


i$02  1903  1904  190s  1906  1907  1908  1909  1910 

caL£.N  DFtf*  YE0RS 


tributing  to  reductions  in  both  investment  and  operating  costs  is 
the  replacement  of  steam  engine  driven  generators  by  steam  tur- 
bine units.  This  is  well  illustrated  by  comparing  the  Harrison 


DIAGRAM  NO.  24 — ILLUSTRATING  INCREASE  IN  ECONOMY  OF  FUEL 

CONSUMPTION. 


109 


Street  Station,  once  considered  a marvel  in  size  and  economy,  with 
the  latest  turbine  stations  of  the  Company,  in  which  the  capacity 
of  a single  unit  exceeds  that  of  the  Harrison  Street  Station  at  a 
cost  per  kilowatt  capacity  of  less  than  one-fourth.  The  improve- 
ment in  operating  economy  in  these  modern  stations  is  partially 
illustrated  by  Diagram  No.  24,  which  shows  the  reduction  in  fuel 
consumption  effected  by  them.  Even  greater  economies  in  labor, 
station  supplies,  etc.,  have  resulted. 

Many  economies  in  investment  have  also  been  possible  in  the 
transmission,  conversion  and  distribution  of  current,  partly  by  the 
development  of  the  art,  and  partly  by  the  use  of  larger  units.  As 
has  been  previously  shown,  the  acquisition  of  large  customers  such 
as  railways  have  made  possible  the  use  of  these  large  generating 
stations,  while  the  increase  in  the  number  of  retail  customers  has 
resulted  in  a decrease  in  cost  of  the  distribution  system  investment 
per  customer. 

Diagram  No.  3 shows  the  reduction  in  total  plant  cost  per 
customer  for  a period  of  years  beginning  with  1898,  notwithstand- 
ing the  large  investment  for  purposes  of  railway  supply  which 
tends  to  greatly  increase  this  figure. 

It  is  well  to  point  out  here  that  much  pioneer  work  along  these 
lines  has  been  done  by  the  Commonwealth  Edison  Company,  for 
which  it  deserves  much  credit.  It  was  the  first  company  to  install 
steam  turbine  generators  on  a large  scale  and  to  take  on  large  con- 
tracts at  apparently  very  low  prices  as  compared  with  past  rates. 
The  result  has  been  successful  and  the  public  is  now  receiving  the 
benefit  of  a lower  rate  than  would  be  possible  otherwise. 

Past  reductions  in  rates  have  not  resulted  in  an  ultimate  de- 
crease in  revenue  to  the  company,  but  on  the  contrary  have  re- 
sulted in  increased  receipts.  It  is  evident  though  that  there  must 
be  some  ultimate  point  beyond  which  rate  reductions  will  not  re- 
sult in  enough  increased  business  to  produce  a fair  return  to  the 
company  on  its  investment.  The  predetermination  of  this  point  is 
difficult,  if  not  impossible,  but  the  indications  in  the  case  of  the 
Commonwealth  Edison  Company  are  that  the  point  has  not  yet 
been  reached. 

Future  reductions,  based  on  the  present  state  of  the  art  can  be 
expected  for  the  following  reasons,  which,  it  is  believed,  will  out- 
weigh eventually  the  upward  tendency  of  labor  and  fuel  costs;  de- 
creasing investment  cost  per  unit  in  generating,  transmission,  con- 
version and  distribution  apparatus  and  appliances;  concentration 
of  consumers,  particularly  in  outlying  districts,  reducing  the  in- 
vestment per  unit  of  distribution  system;  acquisition  of  large  cus- 
tomers, particularly  those  whose  maximum  demands  do  not  occur 
at  the  same  time  as  the  generating  station  peak  loads;  and  the 
greater  use  of  electricity  by  the  public  in  general,  particularly  for 
purposes  other  than  illumination. 


110 


APPENDIX. 

ELECTRICAL  GENERATION  AND  DISTRIBUTION. 

Since  the  art  of  electrical  generation  and  distribution  is  of 
comparatively  recent  development  and  its  study  is  more  technical 
in  character  than  that  of  the  operation  of  most  other  public  utili- 
ties, it  may  be  well  to  include  a brief  explanation  of  some  of  the 
more  important  features. 

Diagram  No.  25  shows  the  modern  power  generating,  trans- 
mission, transforming  and  distribution  systems  such  as  are  em- 
ployed by  the  Commonwealth  Edison  Company. 

Electricity  is  generated  by  steam  turbine  driven  alternating 
current  generators  at  a pressure  of  9,000  and  12,000  volts  and 
transmitted  through  underground  cables  to  sub-stations,  where  it  is 
reduced  in  voltage  for  distribution.  A voltage  of  20,000  is  em- 
ployed in  transmission  to  some  of  the  outlying  sub-stations,  being 
stepped  up  by  transformers  at  generating  stations. 

In  the  territory  formerly  covered  by  the  old  Chicago  Edison 
Company,  viz.,  south  of  North  avenue,  east  of  Ashland  avenue  and 
north  of  39th  street,  the  current  is  changed  from  alternating  to 
direct  current  by  rotary  converter  sub-stations,  as  well  as  being 
reduced  to  110  and  220  volts,  at  which  pressure  it  is  supplied  to  the 
consumer.  Direct  current  distribution  is  employed  in  this  district, 
as  it  is  well  adapted  to  congested  territory  and  its  use  enables  the 
employment  of  storage  battery  auxiliaries  to  carry  the  load  in  case 
of  trouble  on  the  generating,  transmission  or  converting  systems. 

Outside  of  the  above  mentioned  district,  the  alternating  cur- 
rent system  of  distribution  is  employed,  where  the  current  is  trans- 
formed from  the  transmission  voltage  to  4,000  and  2,300  for  pri- 
mary distribution,  which  is  partially  underground  and  partially 
overhead.  Transformers  which  reduce  the  primary  distribution 
pressure  to  110  and  220  volts  for  secondary  distribution  to  cus- 
tomers are  located  on  poles  central  to  the  territory  which  they 
supply.  Alternating  current  is  employed  in  the  outlying  territory, 
as  it  is  the  most  economical  system  where  the  load  is  distributed 
ever  a large  district. 


UNITS. 

The  term  “kilowatt”  (meaning  1,000  watts)  is  used  to  desig- 
nate the  rate  at  which  electricity  is  used,  while  “kilowatt  hour”  is 
the  unit  applied  to  the  total  amount  of  electricity  used  in  a period 
of  time.  The  term  “kilowatt  hour”  may  be  considered  as  corre- 
sponding to  “cubic  feet”  in  the  case  of  gas. 

Expressed  in  more  familiar  terms  the  kilowatt  is  approxi- 
mately one  and  one-third  (1  1-3)  horse  power. 

The  amount  of  electricity  used  by  customers  is  measured  in 
kilowatt  hours  by  a watt  meter,  the  dial  of  which  is  read  in  the 
same  manner  as  a gas  meter.  As  has  been  explained  in  the  body 
of  the  report,  correct  methods  of  charging  for  electricity  should 
take  into  consideration  the  maximum  rate  at  which  the  current  is 
used,  or,  in  other  words,  the  maximum  kilowatts,  as  well  as  the 


Ill 


total  kilowatt  hours  used  for  the  same  period  of  time. 

The  maximum  rate  of  use  is  ordinarily  measured  by  an  in- 
strument known  as  the  Wright  maximum  demand  indicator.  This 
instrument  is  so  constructed  that  it  does  not  operate  instantane- 
ously, but  requires  about  one-half  hour  for  full  registration  of  the 
maximum  load  which  is  in  service  at  one  time,  so  that  a few  mo- 
ments use  of  a greater  current  will  not  cause  it  to  register  a higher 
maximum  than  previously  used  during  the  period. 

The  maximum  demand  indicator  is  re-set  at  every  reading  of 
the  watt  meter,  so  that  the  customer's  maximum  demand  is  ob- 
tained for  each  meter  reading  period.  At  present,  for  installations 
of  less  than  one  kilowatt  capacity  (or  the  equivalent  of  twenty  16- 
candle  power  carbon  filament  lamps),  the  maximum  demand  indi- 
cator is  no  longer  installed  on  account  of  the  comparatively  large 
investment  required.  In  these  cases  the  maximum  demand  is  cal- 
culated from  the  average  of  a large  number  of  previous  installa- 
tions where  the  indicator  was  employed.  A table  of  these  averages 
follows : 

MAXIMUM  DEMAND  TABLE  FOR  INSTALLATIONS  UNDER  ONE  KILOWATT 

CONNECTED  LOAD. 


CONNECTED  LOAD. 

RESIDENCE  LIGHTING. 
(Monthly  Basis.) 

COMMERCIAL  LIGHTING. 
(Monthly  Basis.) 

K.  W.  H. 
at 

Full  Rate. 

Estimated 
Maximum 
Number  of 
Sockets  Used 
Simultaneously. 

K.  W.  H. 
at 

Full  Rate. 

Estimated 
Maximum 
Number  of 
Sockets  Used 
Simultaneously. 

Number 

of 

Sockets. 

Wattage. 

Equivalent 

1 

50 

9 

1 

o 

1 

9 

100 

3 

9 

3 

2 

3 

150 

5 

3 

5 

3 

4 

200 

6 

4 

6 

5 

250 

5 

8 

5 

6 

300 

8 

5 

9 

6 

i 

350 

9 

6 

10 

6.7 

8 

400 

10 

6.7 

11 

7.3 

9 

450 

10 

6.7 

12 

8 

10 

500 

11 

7.3 

13 

8.7 

11 

550 

11 

7.3 

14 

9.3 

12 

600 

12 

8 

15 

10 

13 

650 

12 

8 

16 

10.7 

14 

700 

13 

8.7 

17 

11.3 

15 

750 

13 

8.7 

18 

12 

16 

800 

14 

9.3 

19 

12.7 

17 

850 

14 

9.3 

20 

13.3 

18 

900 

15 

10 

21 

14 

19 

950 

15 

10 

22 

14.7 

In  alternating  current  motor  installations  the  Wright  Maxi- 
mum Demand  Indicator  is  not  applicable,  so  that  the  maximum 
demand  is  determined,  except  in  special  cases,  by  the  following 
percentages  of  the  rated  capacity  of  the  connected  load : 

Where  installations  are  under  10  H.  P.  and  only 

one  motor  is  used 85% 

Where  installations  are  under  10  H.  P.  and  more 


Ill- A 


GENERATION 


— TRANSMISSION 


DISTRIBUTION 


><—  SERVICE 


OFFICE  BUILDING 


D 0 


STACKS 

BOILER  I IrOON 


TURBINE 

ROOM 


SWITCH  HOUSE 


DIRECT  CURRENT 
SUB -STATION 

ROTARY  CONVERTER 


100^ 


Note- the  figures  indicate  approximately  the 
PERCENTAGE  OF  ENERGY  IN  THE  COAL  UTILIZED  BY 
VARIOUS  PARTS  OF  THE  SYSTEM.  FIGURES  APPLYING 
TO  CUSTOMER'S  PREMISES  SHOW  THE  PERCENTAGE 
OF  ENERGY  IN  COR L BURNED  TO  FURNISH  HIS  SERVICE 
DELIVERED  TO  HIM  AND  DO  NOT  REPRESENT  THE 
COMPARATIVE  OUTPUT  OF  THE  TWO  DISTRIBUTION 
SYSTEMS  OF  THE  COMMONWEALTH  EDISON  CO. 

REPORT  ON  CLCCTRiC  9ATEy  190 


TRftNSMISSON  CABLE. 

10.57* 


-SWITCH  BOARD 


D D 

-&■ 


□ D 


0 D 


o a 


0 D 


D □ 


UNDERGROUND  CABLE 


JUNCTION  BOX 


9.17* 


sf- 


SERVICE 


ALTER  NOTING  CURRENT 

SU8-STRTION 


POLE  LINE 


RESIDENCE 


TRANSMISSION  CABLE 

\0.4% 


liit;.. 


STEP-DOWN  TRF.TSFORMER 
PRESSURE  REGULATOR 


10  fo 


UNDERGROUND  CABLE 


87- 


diagram  NO.  25 — ELEMENTS  OF  A LARGE  ELECTRIC  SYSTEM  AND  LOSSES  OF  ENERGY  IN  VARIOUS  PARTS. 


112 


than  one  motor  is  used 75% 

Where  installations  are  from  10  H.  P.  to  49 
H.  P.,  both  inclusive  (irrespective  of  num- 
ber of  motors).. 65% 

Where  installations  are  50  H.  P.  or  over  (irre- 
spective of  number  of  motors) 55% 

TESTING  OF  ELECTRIC  METERS. 

Under  an  ordinance  passed  December  13,  1909,  in  effect  from 
January  1,  1910,  the  City  Electrician,  upon  request  or  tne  con- 
sumer, is  required  to  test  electric  meters  through  which  electricity 
at  a pressure  of  600  volts  or  less  is  purchased.  This  ordinance  has 
not  heretofore  been  enforced,  but  an  appropriation  has  been  made 
for  this  work  and  the  Department  of  Electricity  will  be  in  position 
to  furnish  this  service  as  soon  as  the  funds  are  available. 

METHOD  OF  COMPUTING  ELECTRIC  BILLS  UNDER  THE  WRIGHT  DEMAND 
SYSTEM  USING  COMMONWEALTH  EDISON  NET  RATES 
AS  OF  APRIL  1,  1913. 


Primary  Rate. 

10  cents  net  per  kilowatt  hour  for  all  electricity  supplied 
in  each  month,  up  to  and  including  the  supply  equal  to  30  hours’ 
use  of  the  consumers’  maximum  demand  in  such  month. 

Secondary  Rate. 

5 cents  net  per  kilowatt  hour  for  all  electricity  supplied  in 
any  month  in  excess  of  that  supplied  at  the  primary  rate. 

Comparison  of  Long  and  Short  Hours  Use  of  One  Lamp. 

One  lamp  uses  50  watts.  The  use  required  of  each  lamp 
or  its  equivalent  before  the  secondary  rate  becomes  effective 
is  30  (hours)  X 50  (watts)  — 1500  watt  hours,  or  iy2  kilowatt 
hours. 

Long  Hours  Daily  Use  of  One  Lamp. 

Assume  one  16  candle  power  lamp  burning  20  hours  per 
day.  Current  used  equals  50  (Watts)  X 20  (Hours)  X 30 
(Days)  ==  30,000  watt  hours  or  30  kilowatt  hours  per  month. 
The  maximum  demand  is  50  watts,  and  30  hours  use  per  month 
or  one  hour’s  use  per  day  of  the  maximum  demand  is  1V2 
kilowatt  hours.  The  bill  is  as  follows : 

ll/2  kilowatt  hours  at  10  cents $ .150 

(30  — IV2)  28V2  kilowatt  hours  at  5 cents.  1.425 


Total  net  bill $1,575 

Average  rate  per  kilowatt  hour,  5%  cents. 

Short  Hours  Daily  Use  of  Twenty  Lamps. 

Current  used  equals  20  X 50  (Watts)  X l(Hour)  X 30 


(I 

1 


( 


l 


) 


f 


113 


(Days)  = 30,000  watt  hours,  or  30  kilowatt  hours  per  month. 

As  the  twenty  lamps  all  burn  at  the  same  time  the  maxi- 
mum demand  equals  20  X 50  = 1,000  watts  or  1 kilowatt,  and 
30  hours’  use  per  month  or  1 hour’s  use  per  day  of  the  maxi- 
mum demand  is  30  kilowatt  hours.  The  bill  is  as  follows : 


30  kilowatt  hours  at  10  cents $3.00 

0 kilowatt  hours  at  5 cents 00 

Total  net  bill $3.00 


Average  rate  per  kilowatt  hour,  10  cents. 

When  the  use  of  twenty  lights  for  one  hour  per  day  is 
compared  with  the  use  of  one  light  for  twenty  hours  per  day, 
it  is  evident  that  the  average  rate  in  the  first  case  is  10  cents 
per  kilowatt  hour  and  in  the  second,  5%  cents.  This  difference 
is  considered  just  and  equitable,  because  in  the  first  case,  ap- 
proximately twenty  times  the  investment  in  apparatus  is  re- 
quired as  in  the  other,  in  order  to  give  the  service  demanded. 
While  in  each  case  the  amount  of  electricity  used  is  the  same, 
the  customer  whose  service  requires  a smaller  investment 
should  be  given  the  benefit  of  a lower  rate. 


/ 


4 


